It was like the good old days of the technology boom at the E3 computer games show in Los Angeles last week. At Microsoft's party, models were dressed in fairy costumes, coloured Xbox green, and complete with wings. Arriving guests were sprinkled with rose petals.

Such lavish entertainment is the mark of an industry growing at full tilt.

While the rest of the technology sector is still in a downturn, the US computer games industry, boosted by the continued success of Sony's PlayStation 2 and the introduction of Microsoft's Xbox and Nintendo's GameCube, grew more than 40 per cent last year. Its US revenues overtook box office receipts in US cinemas.

By 2005 the industry could overtake the $18 billion (€19.5 billion) domestic recording industry, according to Deutsche Banc Alex Brown.

This rapid growth could be about to get faster. Microsoft announced last week that it was investing a further $2 billion (€1.8 billion) in its Xbox console, including a substantial investment in Xbox Live, its online service.

"Online is the future of the industry," declared Mr J. Allard, the youthful Xbox general manager, whose hair and goatee beard are dyed a fashionable platinum blond.

If Mr Allard is correct, online gaming could transform the economics of the industry by providing additional revenue streams through subscriptions.

Though he will not say so, it could also improve margins by eventually removing the need for physical distribution through retailers. Online gaming could also become the critical application that at last tips broadband technology into the mass market.

The trouble is that the industry has heard it all before. As Mr Charles Bellfield, vice-president of strategic planning and corporate affairs at Sega, says: "Two years ago Sony was wildly bullish about broadband online gaming. What they were saying was pie in the sky."

Sony has since scaled back both its rhetoric and ambitions. Mr Kazuo Hirai, president of Sony Computer Entertainment of America, admits the adoption of broadband has been far slower than expected.

This week he announced plans to sell an online adapter and develop a few online games. By March, Sony expects to have just five online games available and to have sold between 250,000 and 500,000 online adapters in the US.

Nintendo also announced plans for an adapter but has no intention of developing its own online games yet.

"There has been so much posturing about online gaming but the future is always two years away," complains Mr Peter MacDougall, vice-president of marketing and sales.

Microsoft argues such pessimism is overdone and that it is uniquely positioned to push online gaming. The Xbox is the only console with a built-in broadband connector and a hard drive for downloading new content.

Microsoft expects to have 50 to 60 online games by Christmas 2003. In addition, it will have an infrastructure capable of handling more than one million players, together with billing, authentication and security services to stop people cheating.

It will also be able to promote its service in alliance with broadband suppliers in which it has made investments.

But the biggest uncertainty is whether consumers will pay for online gaming. Microsoft's service costs an initial $49, although a headset is included in the package.

"You bet people will pay if there is significant value," Mr Allard says. "Payment is not a barrier at all if you create content that is worthwhile."

Others are not so sure. "We had a recent a survey which showed that the biggest barrier to online adoption was having to pay," says Mr Hirai at Sony.

Ms Alison Locke, vice-president of North American publishing at THQ, one of the leading US publishers, agrees. "We just don't see the revenue model at the moment."

Microsoft's view is that consumers will pay to download new characters, sports teams and scenarios; to play in competitions at local, regional and national level; for new episodes; and to participate in huge, multiplayer games such as Everquest and Star War Galaxies.

Revenue models aside, Microsoft's timing is also questioned. "It's like surfing," says Mr Bruno Bonnell, chairman and chief executive of Infogrames, the biggest European-based publisher.

"If you start too soon, you get caught by the wave and crash. If you start too late, you miss the wave."

Next week, Microsoft's online revolution begins when 10,000 testers begin using Xbox Live.

By most standards, Microsoft is taking a big bet. But with $39 billion on its balance sheet, it is at least one the software giant can afford.