By Scott Martin

Financial analysts are watching a new player at Microsoft these days. But it’s not Chief Software Architect Ray Ozzie or any number of fast-rising company stars. This foot soldier is Marcus Fenix, lead character of the mega hit game Gears of War.

Gears of War is on track to put Microsoft’s entertainment unit in the black when the software giant on Thursday reports second-quarter earnings, said Directions on Microsoft analyst Matt Rosoff.

“I think that would be good news for Wall Street—it validates the whole Xbox strategy,” he said.

The success of Gears of War appears to vindicate the company’s decision to spend hundreds of millions of dollars to develop a new profit center built around the company’s Xbox video game console and new game titles.

The surprise popularity of Gears of War suggests the success of Halo 2, which pushed Microsoft’s Entertainment and Devices Division to a profit in 2005, was no fluke. Microsoft’s entertainment division that year turned a $28 million profit on $1.45 billion in sales, as Halo 2 became a blockbuster.

Microsoft-published Gears of War sold over 2.7 million copies in the first eight weeks, according to Bernstein Research. NPD Group ranked it at No. 1—ahead of Electronic Arts’ popular Madden NFL 07 football game—with 817,000 U.S. sales of the title in December.

Microsoft sold more than 10 million Xbox 360 consoles in 2006, helping drive entertainment unit revenue of $3.06 billion—an 81.5 percent jump from last year, according to Bernstein Research.   

Microsoft’s long-maligned entertainment and devices division now appears set to contribute about one fourth of the company’s total revenue. Analysts say that the unit could be the second or third-largest revenue source in the quarter.

The financial data follows Microsoft’s recent introduction of its IPTV initiative. Chairman Bill Gates fired a salvo at the Consumer Electronics Show in Las Vegas earlier this month, detailing the software juggernaut’s Xbox attack on the digital living room (see Gates Readies for War With Apple).

Mr. Gates’ CES Las Vegas battle cry was quickly returned by Apple CEO Steve Jobs, who announced Apple TV at Macworld just days later (see Apple Tunes iTV for Battle).  

“With Xbox, the Greeks are spilling out of the horse. Xbox Live is a step now beyond the console,” Bernstein Research analyst Charles  DiBona said of Microsoft.

Microsoft Mojo

Microsoft’s entertainment blast, driven largely by holiday demand, came at just the right time. Long delays in launching its Vista operating system have forced the software giant to defer about $1.5 billion in revenue until later this year.

Microsoft’s Vista woes were partially offset by the popularity of Xbox and sales of Gears of War. With Vista’s consumer release just days away, it appears Microsoft may get some of its mojo back in upcoming quarters.

“2008 is slated to be their biggest fiscal year,” he said. 

On Thursday, analysts expect Microsoft to report net income of $2.3 billion, or $0.23 per share, on sales of $12 billion in the second quarter, according to the consensus of estimates at Thomson Financial. That compares with net income of $3.55 billion, or $.33 per share, on sales of $11.8 billion a year ago.    

Investors have driven Microsoft shares up 44 percent from a 52-week low of $21.46 in June to close at $31.11 on Friday.