Lazard Capital Markets analyst Colin Sebastian has filed a report following a meeting with Microsoft's Xbox executive team, and management seemed to be pleased with the success of the Xbox business thus far.

"Management appeared to be upbeat regarding the current state of the business, particularly with progress made in establishing the Xbox 360 as the early leader among next generation consoles, and also with penetration and usage of Xbox Live services," Sebastian stated. "We also believe the Xbox 360 may be benefiting at retail this holiday from short supplies of PS3 and Wii consoles. Recently, Microsoft executives reaffirmed the company's goal of reaching 10 million Xbox 360 units installed worldwide by the end 2006."

Sebastian also noted that management pointed to Gears of War—which has overtaken Halo on Xbox Live in terms of popularity—as an important title driving incremental hardware sales for the 360 business. Overall, based on his retail checks, Sebastian said that Xbox 360 software in general has been "strong" at retail this holiday season.

Moving forward, the combination of Xbox Live and a number of highly anticipated titles should continue to boost the 360 business.

"We believe there is a strong lineup of software targeted for release in 2007 on the Xbox 360, including Halo3, GTA IV, Crackdown, Mass Effect, Bioshock and Splinter Cell 5, among others. North America remains the strongest Xbox 360 market, however Microsoft appears to be making some strides in other geographies, most notably in the U.K. and northern Europe, while we believe sales are still weaker in Japan," Sebastian said.

He continued, "Xbox Live continues to be a significant point of differentiation for Xbox, and we believe Microsoft remains focused on distinguishing the Xbox 360 through a robust online offering, including Arcade, community features, digital downloads/micro-transactions and in-game advertising (through Massive)."