Speech Transcript – Robert J. Bach, iHollywood Digital Games Summit

ROBBIE BACH: Good morning everyone. I am certainly glad to be here at the Digital Games Summit.

I thought for a while last night that I wasn’t going to make it. If I sound a little gravelly, it’s because I got to the airport in Seattle in four and a half inches of snow at 5:00 yesterday afternoon. We finally got on the 7:10 p.m. flight at 8:45. It took off at 11:30 p.m. and got to Las Vegas at 1:30 a.m. Weather was a problem but I am excited to be here and to share some thoughts with you as a kickoff to today’s activities. What I am going to do here is talk briefly about Microsoft’s liberal approach to the home, then talk a little about the games industry and what I think are some critical things we need to do. Finally, I will talk about that in the context of what we are doing with Xbox.

If you think about this from the consumer’s perspective, consumers look and say, “I love my cell phone but I want to have the context be the same as on my PC.” They look at it and say “Gosh, my music, I want to have access to that everywhere”. People look and they say, “I want it on my portable, I want it on my car, I want it in my house, and I want it wherever I go.”

Think about the things people are doing with digital photography. I have taken all of our family pictures in digital format for two or three years and I have about 1,500 pictures. Organizing them, sorting them, and figuring out how to display them is not easy. There are real challenges in all of these consumer scenarios and experiences. Networking is really critical to the future of the digital home but it is too difficult to do today. We need to make that easier. If you think about television, there are tremendously rich scenarios in the television space about enabling people to customize and control what they want, when they want it. We have to do a better job of doing that.

When you put all of these things together, calendars and all of the things that people want to manage in their homes, you come to realize that many of the things that we are doing are not about technology. If it is about technology, we are not on a path to succeed. The technology is difficult. The exciting and key thing for us is how to deliver rich experiences to people, and how to deliver them in a way that is seamless and easy for people to track. Today if you are a high-end video- or audiophile or a video game-phile, you can do some amazing things in the home. Five years from now, we want people to be able to do amazing things, people who are just ordinary people who want to have fun experiences in the home. At Microsoft, we think about what the digital life experiences people want to have. We categorize them in a couple of places.

First, I want to get more done: productivity, browsing, shopping; things that you think about in your everyday life when you use technology to be more productive. Second, you want to stay in touch. A tremendous amount of what people do is about communication, staying in touch with family, staying in touch with people in the same household and staying in touch with your work life and your home life. All of these things are critical experiences for people to deliver. Finally, which is where I spend most of my time, is enabling people to have more fun. How do we bring richer and richer experiences? Entertainment experiences that are more interactive, more exciting and more engaging than they have ever been before. I think that those three categories of experiences are what we look at as the future, as you come to CES, as you come to think about Microsoft’s approach to this space. Those are three areas we’re very focused.

Now in order to deliver that, there is an approach you need to create a platform for Microsoft, our partners, retailers, and others to bring these experiences to life. At the center of that, obviously for us, is the PC. As you’ll hear in Bill’s keynote tonight, we are very excited about the Media Center PC. The fundamental work it can play in the home, as a centerpiece, for what can happen in the home. Not just as a productivity tool, it can certainly be that, but as a gateway to manage the network, your interactions on the Internet, and store your media to deliver it to where you want it when you want it. The challenge for us is to make that easy for people to do. It can’t be a job. It has to be something that works like other appliances in your home.

Now, surrounding that PC, we think there are going to be a lot of different devices because people want their media, their experiences, and their information to be delivered in different formats, locations, and areas. Whether it is SPOT watch or Smartwatch, which you will hear about tonight, a Pocket PC or other handheld mobile phone, an Xbox, a set-up box, whatever those devices are, they are going to be connected in the home. The exciting thing for consumers is enabling them to get their info on the right device, at the right time. Again without having think about it or do complicated things.

That brings me to the last critical part of this picture, which is thinking about what really makes it all happen. For us, it is about software and services because in the end, all the hardware, networking, and plumbing, if you will, in the home isn’t what’s interesting. What is interesting is what people interact with and the things that are going to make this an easier and better experience for people. These are the software and services that Microsoft, our partners, and others in the market provide. We think that it presents a tremendous opportunity as a whole. My first big job at Microsoft was working on the Office business. In the early 1990s it was a tremendous opportunity to digitize business. We are at the same point in the home where there is a huge opportunity for is to digitize the way people think about things in the home. It is also a great opportunity to make it easy through the software and services that we provide. Let’s move then from the general to the more specific. We are at the Digital Games Summit, so let’s talk about video games and their role.

There are really two things that I want to point out on this slide. One, if you look at the analyst predictions, the opportunity for growth in this space is tremendous. Although some of you may be analysts and forecasters yourselves, and your numbers may be different than these, the point still remains the same; there is tremendous opportunity. At the same time, I want people to think about the fact that this is still a business that is very young and immature. We like to talk about it as being as big as the movie industry but that is a little figment of the numbers. Yeah, video games may total some of the same numbers as what the movie industry generates at the box office. However, when you add the video sales, rentals, and all other ancillary revenue streaks, we still are a very young industry. If you think about video games as pop music, we are big. However, in pop music there is not an equivalent of our R & B, rap, jazz, and classical music. The genre isn’t rich and if we want to grow as an industry we have to find ways to interact with other forms of entertainment, music, video, and TV. We also need to find ways to broaden the experiences we need to deliver. I think the central thesis for people to think about is: What are we doing in the video game business in the next five to ten years to take our penetration from 40 percent to 60 or 70 percent? What are we doing to expand the beyond the 15-35 year-old male audience that we are catering to today? Finally, how are we delivering on that?

Now, what I want to do in the context of Xbox is talk a little bit about those questions and also give you an update on where we are in the business. If you think about that vision that I just painted, as our 10 to 15 year vision of why we are in the business, the idea of the digital home and the ability to broaden the audience are very closely intertwined. Let’s take a status look at where we are with Xbox today. We are 25 months into the Xbox experience in the United States, just a little over two years. Our two year anniversary was November 15, 2003. This holiday we had a very successful season. We are very pleased with the results of the console and especially for the games where we saw some really strong results. We are on track to hit our shipment numbers. By the end of June, our install base worldwide will be between 14.5 and 16 million game consoles, which we are very excited about. In some ways, equally important, we think our subscriber base for Xbox Live, which is our online gaming business, will be over 1 million subscribers. I will talk in detail about that in one moment. Market share base is about 25 percent. That varies between 20-30 percent depending on what market in the world you look at. We are No. 2 in North America and Europe and No. 3 in Japan. Our attach rate at this stage, games per console, two years into the industry, is higher than any other console has achieved. There is a lot of third-party game title support. There are also a lot of great games. It is a pretty simple status report. I am excited and very pleased where we are. We are on track with the plan that we are building. To return to my original thesis, it is a 10- to 15-year track that we are on.

What we have succeeded with the Xbox to date is really what I will call “working the core audience,” in what the core of what is video games today. To that effect, we have to decide, develop, and build plans over the next 10 years to figure out how we will expand beyond that core success. To broaden the success in the market place, as well as enabling other people to reach out to more customers, and to have access to more people so that this market can really achieve some of those very high growth projections that we’ve put forth for the industry.

I am going to talk about growth opportunity in three spaces. First, I will explain how we are working to expand the content, since, in the end, this is a content business and content does drive what we are doing. Next, I am going to talk about expanding the community. Because one of the things that has to happen is we have to turn video games from being a solitary experience into being a communal experience. That is what brings mainstream media home for people. Finally, I want to talk about expanding competition, because in the end, playing the game is at some level about competition. Figuring out how we do that, how we make that broaden for a wider audience, is very important.

Now, on the content side, we can certainly not lose sight of the core audience. Some of the game titles we shipped this holiday season appealed to the core audience. The core games, again, are titles that appeal to the 15-40 year-old male audience, who we have been catering to for the last two decades. That can and must continue. That audience is the heartbeat of what happens in the video-game space. I think it is very important to understand that this is not a move away from what we have done but rather an expansion. To that effect, in our own simple way, just two years into Xbox, we have been spending a lot of time trying to broaden the content on the console. Whether that means appealing to a younger audience with “Barbie Horse Adventure” or working with movie franchises such as “Harry Potter” and “Scooby Doo.” The Xbox Music Mixer, where you can actually do Karaoke, play your music from your personal computer, or locally on your Xbox TV, helps to broaden the entertainment as well. Experimenting in ways we can expand beyond that core audience and reach into new parts of the marketplace. If we do that successfully on the content, it is the “if-we-build-it-they-will-come” approach. We have to continue the experimenting and reaching out into new areas.

Next, I want to talk about expanding the community. If you think about Xbox Live, this is a place where we have really invested in leadership. We have built the largest broadband content service in the world, paid content service I should point out. We have, as of last June, 500,000 paid subscribers and we think we will have over a million paid subscribers by next June. On average, in a week, we see 1.5 million game sessions. In the week of Christmas, we saw a million game sessions a day for five days in a row. It gives you some idea of the power of what this does because it gives people the opportunity to meet new people, to create a social environment, and to play against other friends or against other people. We are now in 19 countries with a multitude of broadband partnerships. You are going to continue to see that expand around the world. I think the essence of what is happening here is that we are finding a new way for people to have social experiences and we are blazing new trails. The business model is new, the content model is new, the genres of content are new. This is all a green field so the challenges are that we are going to do some experiments, in which some will succeed some will not, but we are going to keep investing and building in this space for the future. It is fundamental to how we broaden the audience. Just one data point which I think is interesting to bring over from the PC side, our PC online site, our PC online site, the (game) zone, 65 percent of the people playing games in the zone are women. That is not true on Xbox Live today. Five years from now, I hope that the audience on Xbox Live has that kind of breadth and that we can reach out to a very broad audience. Cater to the core gamers, but bring new capabilities to Live that builds the community that we think represents the broader population. I want to show you briefly just an ad on Xbox Live which I think in a cute, funny way brings home, a little bit, how we think about Xbox Live.

(Video Segment)

The idea here is really to create a virtual world. The idea that you can meet your friends at any time, any place and that you can create virtual worlds and leisure. That brings us to expanding the competition. We created something called XSN Sports as an example here. We really are enabling people through our games to create their own leagues, create their own tournaments, create their own teams, and create their own rec rooms, if you will. This happens in a world where you can play with friends, meet new people, and compete in a very fun and safe environment. This is just a simple aspect of how we want to expand the community and reach out to broaden the audience and bring people into this space. If you think about fantasy leagues in sports, there are a huge number of people playing fantasy leagues. The players are much broader than you may think. The whole concept of how we can broaden the audience is what we are doing in video games, is really what XSN Sports is all about. It is also what the idea of expanding the competition is about. With that, I am going to show you one game we are coming out with Tecmo, called “Ninja Gaiden.” There is no speech that I could deliver at the Digital Game Summit that could be complete without showing you this game. I will then wrap up the speech and make some concluding comments. If we continue the tape, we will see a little bit of “Ninja Gaiden.”

(Music and “Ninja Gaiden” tape playing.)

To me, that game is incredible and in some ways is a great way for me to conclude. It crystallizes the challenge for us. That is a game that will sell spectacularly well. It will appeal to the core audience; it is beautiful; it is exciting; it is engaging. The challenge for us is how we take that excitement that the game creates with the core audience and figure out through some of the things that I talked about earlier, the way we integrate with the home, how to meet with other media, and the need to build on this digital lifestyle. We need to broaden the experience and deliver it to the masses. This will create greater opportunities for everyone in this room, the partner companies, and the retailers.

I want to thank you for coming this morning. Hopefully, this speech will give you some things to think about during the day. Have a great CES. Thank you very much.