Microsoft's Xbox hits the spot for new wave of pirates, hackers and cloners

Microsoft's Xbox games console is rapidly becoming the hardware of choice for an ultra-sophisticated new breed of computer hackers.

Although the machine is selling more slowly than Bill Gates had hoped, and he was forced to cut the price within just a few weeks of release, it has spawned a burgeoning community of software pirates who have realised the huge potential of the powerful technology inside.

Hackers have discovered that with a bit of tweaking and a computer chip available on the internet for $69 (£45), the Xbox can be used to play pirated games, movies and music. Industry analysts are now predicting that the machine could unwittingly create a vast global market for illegal software.

In another blow to the Microsoft chief, the hackers have devoted themselves to subverting the operating system that powers the Xbox. They are putting the finishing touches on an Xbox-compatible version of Linux – the great rival to Windows that was written by anti-Microsoft programmers.

For the hackers, one of the most appealing elements of the Xbox is the very factor that Microsoft hoped would sell the machine: it is designed for internet access. Although the original intention was to allow gamers to challenge each other in cyberspace, hackers have identified it as the perfect channel to allow the sharing and swapping of software. As well as enabling people to use illegally copied CDs and DVDs, the hackers are understood to have come up with a method of channelling films, games and music to the Xbox over the internet.

Another advantage that the Xbox has is that it is the first games console to include a hard disk as part of its technology. Because of its size, the hackers have realised that they can store large chunks of their own code in the Xbox's memory to help them decode software and work on their own home-spun games.

The first port of call for the hackers is a small chip that can be bought cheaply over the internet from a variety of UK and US websites that have sprung up to meet the surging interest. This, when soldered on to the Xbox motherboard, allows access to the machine's inner workings.

Microsoft is aware of the problem of "mod chips", as they are called, and is known to have investigated methods of shutting down their production. On legal advice, one chip producer shut down a mod chip project known as Enigmah-X last week. It is nevertheless assumed that there will be plenty more ready to fill the gap in the market. Sony, whose PlayStation2 has been on the market for nearly two years, already knows the difficulty of trying to stop the hackers. It managed to challenge the producers of a device known as "Messiah" but the chip is still mass-produced in the Far East.

As with many hacking sites on the internet, conspiracy rumours abound on Microsoft's take on all this. One popular theory is that it is secretly delighted hackers are targeting the Xbox as it gives Microsoft a spur to develop bigger and better security software to sell to corporate customers.