Gates also emphasized how Xenon would take advantage of the growing availability of televisions and content in high-definition (HD) format, which allows clearer pictures to be displayed on large, wide screens.
Microsoft is planning release details of its next generation Xbox on may 12 in an MTV special, ahead of a key gaming conference later this month where Sony is also expected to talk about its successor to the PlayStation 2, its current generation console and market leader.
"What we've got in this (next round), at some significant financial cost, was the right to play again with great credibility," Gates said. "So now people are looking at the two companies at a pretty much equal basis."
Asked if Microsoft would be able to beat Sony with Xenon, gates said that several top employees involved with Xenon had promised Microsoft Chief Executive Steve Ballmer that Xenon would beat Sony and that he welcomed that "competitive dynamic."