After revealing a boost in online activity following the launch of the "New Xbox Experience," Microsoft director of product management for Xbox 360 and Xbox Live Aaron Greenberg offered new insight on Avatars, Xbox 360 game downloads and competition from Wii and PlayStation Home.

Below are highlights from a Thursday phone interview with Greenberg.

People want avatar items based off of third-party properties, virtual Street Fighter clothing for example, stuff like that. Do third parties have access to dev kits that will let them put their stuff on the Marketplace for avatars?

Yeah, absolutely. Our avatars are just now completed. So we've just handed off all the code to developers so they can not only integrate avatars into their games, but they can also have things like unlockable content, special outfits and things like that, so game assets can be integrated into avatars.

As gamers, we definitely want to integrate our favorite game characters. Sports fans want to represent their favorite teams. I think that's the kind of stuff you should expect this coming year. Now that avatars are done and in the hands of developers, they'll be able to integrate them into their games.

How can we anticipate pricing on avatar items?

Our vision for avatars is really an extension of your identity. I think it's worked really well. We didn't create avatars so we could sell people clothes. Who knows what will happen in the future, but for now, all of the gear, all of the clothing is free. And if developers have unlockable content in games, you're not going to be charged for that.

When will we see full Xbox 360 large game downloads on Marketplace?

None of us will deny that digital distribution is the future. How fast that happens, who knows? We're definitely paying attention to it. It's something I think we've experimented with, and we continue to be surprised by the appetite for digital distribution and the rate that it's growing. It continues to be well ahead of what we expect.

With PS3 offering full game downloads, it seems like something that Microsoft cannot ignore.

It's something we're paying attention to. We don't have anything specific to announce today, but it's something we're watching for sure.

In an interview you did with Kotaku, you said that Wii owners will want to upgrade to Xbox 360. We've heard you say that before, but is there any hard evidence that this is actually happening? If that were true, we should be seeing around, say, 700,000 Wii consumers per month "graduating" to an Xbox 360 any time now, right?

[Laughs] Well, we didn't say they'd all graduate the same day or overnight. The point is that we as an industry need to recognize that there are different consumers with different tastes who want different types of experiences. What Xbox 360 offers is dramatically different than what Nintendo offers with the Wii. Wii has had a lot of success. Xbox has had a lot of success. I think what we see are two companies doing very well in the marketplace, and I think there's sort of been this perception that there's only room for one platform to thrive. In many ways, Wii and Xbox 360 have been complementary. We've seen people buy Wii for younger kids in the house and Xbox 360 for games and entertainment. I think that's a good thing.

You got some gamers riled up when you told Kotaku, "What Home to me feels like is Second Life for hardcore gamers. It doesn’t feel like it broadens the experience and invites people in. When they unveiled it, it seemed innovative. I think what's happened is now here we are a couple of years later and we're beyond that. It feels like 2005 tech in 2008. I'm not sure that’s what people want." Is that being too harsh? This is a major feature upgrade to the console. It's still in beta, it will add more features. Isn't it too early to just discount this as "old tech"?

Yeah, yeah. I think it's fair to address that. What always happens with the Internet is people isolate specific comments and things that you say, but you don't always hear the full story. I do believe what I said is actually the case, and I do stand by that. But at the same time, we recognize Sony as a very formidable competitor, and the fact that they're making investments in online validates what we have believed for years. When we launched the original Xbox years ago, we bet on the fact that you could actually create an online community in the living room.

On the comments about Home, if you look back at when this was actually announced, it was when things like Second Life and virtual worlds were still having some popularity. I think what's happened since then is people have "been there, done that." They've realized virtual worlds are fun for a short time, but it's hard to keep those worlds fresh and exciting and keeping people coming back and keeping them safe for all ages. We've seen what's happened to Second Life and what's happened with Google's Lively project, which is now closing.

It's tough. Online innovation happens at a much faster pace than hardware innovation. The challenge on us as companies is to stay on the cutting edge. As I look at the Home experience, it feels like a 2005 experience in 2008. It feels like Second Life for hardcore gamers. And I'm not sure that's something that will help Sony sell consoles or bring in a broader audience.

That said, we don't underestimate Sony, and what they bring to the market.