Concerned about Sony's successful PlayStation console damaging the personal computer market, Microsoft initiated plans in 1999 to create its own console gaming system to both diversify its product line and capitalize on the thriving gaming industry. The system—originally termed the DirectX-box for its use of the eponymous video software—underwent multiple launch delays and several pricing adjustments after it made its debut. Despite popular titles such as Halo: Combat Evolved and Halo 2, Microsoft reported in 2005 that it had thus far lost $4 billion from the Xbox enterprise.

Xbox offered superior technological features (as compared with its competitors), but it lacked some of the software licensing benefits available to rivals Nintendo and Sony. Xbox Live, the Xbox's online gaming network, debuted in 2002 and allowed players to compete against one another over the Internet. More than two million players subscribed to Xbox Live, establishing it as one of the Xbox's greatest successes. Many people exploited security flaws in the Xbox to modify the system so that numerous copies of games could be stored on the console, a process that was popular despite the fact that such alterations voided the warranty. In 2005 the Xbox was replaced by Microsoft's Xbox 360, but, even with a superior console available, many players continued to use the original Xbox and take advantage of the Xbox Live network.