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Software sales for the Microsoft console are up too, reaching $US2.7 billion over the past 12 months and Microsoft's online subscription service, Xbox Live, which costs $US50 a year, has boosted its membership to 12 million people and racked up revenues of $US1 billion since its launch in 2005, the report notes.

The redesigned interface prominently features "huge icons displaying your current game, videos, music, online friends and system preferences. While the graphical interface is a much-needed simplification of console navigation, the meat of the update is a new feature involving avatars", Forbes.com says.

Just like Nintendo's avatars called "Miis," Xbox 360 owners will now be able to "create digital representations of themselves that will seamlessly move throughout the casual titles featured in Microsoft's Arcade".

Friends can meet in the community room. Up to eight people will be able to chat, share photos or hop in and out of bouts of arcade games like "Uno."

Microsoft's avatars will also be included in "the new channel called Xbox Live Primetime. Merging television watching and games allows content providers to create virtual game shows, according to the report.

Instead of using a live audience, the service culls participants from the Xbox Live community. That makes all the contestants actually avatars even though the host is live and the prizes (which go to players) are "real."

Microsoft says a number of Hollywood entrepreneurs are "currently looking for ways to get involved with the program".