Robbie Bach: New York Times Breakfast with Microsoft

Discussion with Robbie Bach, Senior Vice President and Chief Xbox Officer, Home and Entertainment Division, Microsoft Corporation
“Vision and Strategy in the Consumer Marketplace:” A New York Times Breakfast with Microsoft
Moderator: John Markoff, Senior Technology Reporter, The New York Times
Churchill Club, Palo Alto, California
April 27, 2005

JOHN MARKOFF: So I tried to do a little bit of research before and tried to get my spies at Microsoft to have something interesting to say about Robbie but I ended up with a question actually. Is it true you went to college with Michael Jordan?

ROBBIE BACH: It is, in fact, true.

JOHN MARKOFF: Did you know him or did you just watch —

ROBBIE BACH: The irony is we lived in the same dorm and the basketball players were all on one floor, one floor down below us. So we heard the noise from down below. But when I was there it was James Worthy, Sam Perkins, Michael Jordan, Brad Doherty; it was a pretty amazing time.

JOHN MARKOFF: And did they win the —

ROBBIE BACH: They won. When I was there they won the national championship, beat Georgetown in the famous wrong pass to James Worthy who went the other direction. So this year was a good year for me feeling as an alum from Carolina; to see them win was a good thing.

JOHN MARKOFF: So are you going to surprise us and introduce the Xbox next year?

ROBBIE BACH: No. (Laughter.) No, I think as you know we’ve got some important events coming up. We’ve announced some work we’re doing with MTV and as well E3, which is the big videogame and computer game trade show down in Los Angeles in mid-May so those will be obviously important venues for us.

JOHN MARKOFF: I saw the trailer. Do you want to try to describe the trailer, the MTV trailer?

ROBBIE BACH: Well, describing the trailer is hard but the sort of ad they’re running is really trying to point out to people from wherever they are around the world, because there are people in the trailer from different parts of the world, and the event is actually a worldwide event, so, in fact, MTV is going to be broadcasting not just in the U.S. but in all their affiliates around the world where you have the VJs coming in from different markets so that the show will be presented locally in each location. And so the trailer tries to lead people up to what’s an exciting announcement.

JOHN MARKOFF: I get the sense that you guys are feeling pretty good these days, that it’s been a pretty slow ramp. I mean, am I being nice? You guys have had a pretty tough slog.

ROBBIE BACH: No, I think when we went into this marketplace we knew this was going to be a tough market. Sony is a great company, they’ve got a good product and a good brand. They were out ahead of us with PlayStation 2 before we shipped Xbox. And so we knew going in that this was going to be one of those 10-year, 15-year type projects, not a put in the market something for two years and all of a sudden you’ll have big success.

But that said, if you consider that three years ago we’d never done anything in the console space and now this past holiday we outsold PlayStation 2 in the United States, we feel like we’ve made a lot of progress.

It hasn’t been completely smooth. Obviously there are bumps in the road on anything, a project of that nature, but we feel like we’ve got a lot of momentum.

JOHN MARKOFF: How much credit do you give yourselves for this holiday’s performance? How much of it was about Halo? I mean, how much of this is a hit business?

ROBBIE BACH: Well, I think it’s a combination of a number of things. Like all these things, it ends up being a number of different factors. Certainly even prior to Halo 2 shipping we were gaining share and had some momentum in the marketplace, so some of it is just the natural accumulation of momentum. This is a business that thrives and drives on momentum and that’s one of the characteristics. And so the ball was kind of rolling the right direction and then you had something like Halo 2, which is clearly a milestone not just for us but for the industry.

JOHN MARKOFF: How much of a milestone? What are some of the figures?

ROBBIE BACH: Well, think about it this way: It was the largest day in entertainment history in terms of sales. We sold $125 million of product just in the United States in 24 hours, which is larger than any movie opening, larger than any music CD going on sale; it’s larger than anything that’s happened in the entertainment space. So when you think about that, it’s pretty amazing.

If you look at what’s happened following that, on our Xbox Live service we have had over 200 million hours of Halo 2 game play, so you think about that. I mean, when you start looking at some of the numbers it makes you worried about productivity in America but that’s sort of a separate question. (Laughter.)

JOHN MARKOFF: Yeah, we’ll get to that.

ROBBIE BACH: Yeah, I’m sure we will, I’m sure we will. (Laughter.)

JOHN MARKOFF: So have you given a more recent number than the 125 million? Are you over 300 million?

ROBBIE BACH: I don’t actually know. I don’t actually know.

JOHN MARKOFF: I’m just wondering is it bigger than any movie? I mean, is it into that kind of stratospheric realm?

ROBBIE BACH: It’s a good question. Worldwide it’s probably — well, there are some movies that have been 500 if you sort of do the math. But by any measure it is a phenomenon.

And for us, you know, the cool thing about that is it creates buzz around Xbox that obviously we think — not to pull a really bad pun — that has a halo effect going forward and really helps us as we start to look to the future.

JOHN MARKOFF: So let’s talk a little bit more about MTV. I’m sort of wondering to what extent this world of videogaming gets beyond boys, you know, boys like me and you but boys. What does MTV mean? Is that an indication that this is broken out or is it still too early to —

ROBBIE BACH: Well, I think MTV and the idea that we’re going to show the product for the first time on MTV really has kind of two aspects to it. The first of those is I think for the first time the industry is saying, hey, we want consumers to see this first. Historically this has always happened at E3 and E3 will still be a huge opportunity for us and there will be a lot of things we can’t talk about at MTV that we will talk about at E3 but for the first time consumers are going to be the first people to get a look at what we’re doing. And we think that’s an important milestone just by itself because it’s a recognition of this as a broad consumer market where you really can drive a lot of momentum directly with consumers themselves.

And then I think the second point, which is the point I sort of made a little bit when I was describing the ad, is we think of this as a worldwide phenomenon and we think of it as something that cuts across what you might think of as traditional stereotypes in the gaming space. So in the ad, there are women in the ad who are looking forward to this event, there are our people from Japan, from the United States, from Europe, it is a broad concept.

Has the industry broken out? I would tell you you’d look at it and you’d say, well, it’s over a $20 billion industry so it’s a pretty big industry. On the other hand you look at household penetration and in the U.S., which is the best market in the world on household penetration, we have about 35 percent household penetration for consoles. Compare that to DVD players or TVs and we haven’t broken out yet. So you could kind of look at it both ways.

JOHN MARKOFF: And what’s the demographic now? What percentage are women?

ROBBIE BACH: The demographic now probably at this stage in the lifecycle is probably 75/25, 75 percent male, 25 percent female. In the first days of the next generation it will be closer to probably 90/10 because the key kind of what you would call the hard-core gamers still are predominantly male.

JOHN MARKOFF: So I’m old enough that I remember the rise and fall of Atari. (Laughter.) Probably not what you want to hear right now, but there was —

ROBBIE BACH: Well, maybe since the leader is not us. (Laughter.)

JOHN MARKOFF: That’s true. But, in fact, that was — I mean, there are these waves, these junctures, these points where you’ve pushed us to one, we’re going from one generation to the next and maybe it’s not a slam dunk. I mean, I remember a Mercury reporter who interviewed an Atari engineer in the parking lot as he sort of took his box out into the parking lot when he was laid off on that downturn and his comment was, you know, “We thought everybody would spend all their time in front of consoles and we were wrong, they wanted to be outside on bicycles.” I mean, how much of it is a given that you’re going to get more acceleration in this generation?

ROBBIE BACH: Well, it’s like any other market, everybody here who works knows that nothing is a given. And so for sure you have real work to do and you have to present something that is compelling entertainment. And so the bar really is no different than in any other industry. If TV stops presenting compelling entertainment people go elsewhere.

And so our challenge is to continue to present compelling entertainment, stuff that’s more compelling both than what’s happening in this generation and to some degree more compelling than other things we compete with, because certainly Microsoft competes with Sony and Nintendo but the three of us compete with other forms of entertainment and leisure time to attract people to what we do.

So everybody asks me the question, well, so what do you think is going to determine what happens in the next generation? And the thing that’s going to determine it is how good of an experience we present and how consumers react to it.

JOHN MARKOFF: And if you had to divide that, what percentage of that is technology, which you control a lot of, and what percentage of it is storytelling, which seems like it’s more fickle?

ROBBIE BACH: Well, it’s certainly a combination of both. We would tell you that you need a great platform, which is not just hardware, it’s hardware plus the software infrastructure that goes along with it now because the software actually plays a huge role in this space now, and it’s services. I talked about Xbox Live and the things that go along with that. It’s a combination of those three things that in a way give people a great toolset. It’s like giving a painter or an artist a great canvas with the right paints and the right materials. And you’re right, then some of it is what are they able to create and what happens in the creative mind.

The role that technology plays in large part is to get out of the way. For most of the people who are creating great videogames the constraint has always been, well, the technology keeps me back; I get to a certain point and the machine doesn’t have enough power or the television display is frankly not a great display, which is true today, with the standard television today it’s not a great display. So they have to work around that.

In each generation our job from a platform perspective is to remove more and more of those barriers so that you can free up the creative artist.

Look, the people in the industry who are doing the games have amazing ideas, so I am not worried about the idea part of the business. Our job is to make sure they can actually bring those ideas to life.

JOHN MARKOFF: Have you had another hit besides Halo? I mean, what else is sort of —

ROBBIE BACH: Oh yeah, we’ve got a product called Fable, which has sold, I don’t know, over 3 million copies; Project Gotham Racing, that series has sold probably 2 or 3 million copies. There’s products that Microsoft doesn’t do, Splinter Cell, which is done by Ubisoft, has been a huge hit. They’re now working on, I think, they’re on version three or four of that product.

So there have been a number of franchises that have been associated with what we’ve done in Xbox that have been very, very successful.

JOHN MARKOFF: So let’s do a little mind experiment here.

ROBBIE BACH: Uh-oh, this is always dangerous.

JOHN MARKOFF: This has to do with both Bill Gates and Steve Jobs have talked about this thing called the digital lifestyle. And I have to tell you when I hear digital lifestyle, although I’m a gamer, there’s something about it that makes my teeth itch. (Laughter.)

ROBBIE BACH: I’m not sure how to react to that. (Laughter.)

JOHN MARKOFF: What if you think of yourself as sort of an alien anthropologist who comes down to Earth and you sit down and you see millions of people in trances sitting in front of screens manipulating symbols and maybe screaming — if they’re at home maybe screaming every once in a while. I mean, do you ever step back — I mean, you’re creating this world and do you ever step back and sort of think about it?

ROBBIE BACH: Well, in a way sure, but I can do the same thing, I can do the same science experiment and go to a football game and the alien would have exactly the same reaction, which is, you know, you’ve got a bunch of guys who every minute huddle up and then they go up to the line and they beat each other up and the crowd goes crazy. I mean, it’s sort of the nature of entertainment that it is a uniquely social experience. And when you get into those things it is culture, so it’s a hard thing to understand if you’re not from the culture.

And even within planet Earth, the culture around videogame entertainment is actually quite different depending on where you are. The culture in Japan is different from the culture in the United States is different from the culture in China is different from the culture in Europe.

And so anytime you’re talking about these things it is interesting as an anthropologist but you have to sort of recognize that it is just that, it’s part of the social fabric of what people do.

JOHN MARKOFF: So when are we going to — it would be a big step, I would think, if there would be a breakout game that was not a first-person shooter. I mean, let me —

ROBBIE BACH: Oh, there’s tons of those, there’s tons of those today though.

JOHN MARKOFF: But which would perhaps attract both sexes. I mean, it seems to me that the first-person shooter is a sort of uniquely male activity.

ROBBIE BACH: It certainly skews more that direction, sure.

JOHN MARKOFF: So there was a guy by the name of John Barnes who wrote this really remarkable science fiction book called “Mother of Storms” in about 1992 or 1993, which sort of encompasses this world you’re sort of getting at with your 200 million hours. And what he did was — you probably don’t want to hear this either — he put together this world which was based on the Net and anonymity and pornography, and he wrote this novel, which was not particularly great fiction but it was great sociology, but it would basically make any parent’s here hair stand on end.

But what I’m looking for is an experience that’s more compelling than a sitcom. I mean, have we already crossed over on that because he described that world where the actors become the entertainment and you’re sort of there with the first-person shooters but are you there with other games?

ROBBIE BACH: Well, certainly if you look across the industry I’d say there have been breakout things that are a different game experience. And you may like or dislike them based on what goes on in the game but take something like The Sims, which is predominantly a PC-based gaming experience but that is a very broad experience and a very different experience. It is sort of anthropology again because it’s the simulation of a life of a family. It’s an interesting game and it attracts people who are of all ages, it attracts people who are males, females, whatever. And so you do see those kind of breakout games.

I also think you’re going to see some things that are breakout, what I’ll call breakout experiences. You look at something like some of the work we’re doing to enable people who are casual gamers to enjoy that experience in a casual way. I think one of the challenges we have with gaming today is that part of the reason it doesn’t break out even more broadly than it has is because it requires an investment. I mean, if you want to be good at some of the games it takes some time; you have to practice, you have to work at it. And what we need are more experiences that are casual and fun.

And you see that, in fact, you see more of that actually on the PC today. If you look at our online gaming site, the Game Zone, you go to EA’s Pogo, you go to RealNetworks’s site, there are hundreds of casual puzzle strategy games that have wide usage, they’re 15-, 20-minute games and just to pick a demographic example, 65 percent of the people who do that type of gaming are women.

And so you are seeing those types of things and the creativity that has to come out is how to scale those types of experiences so they’re at the scale of a Halo 2 and can generate and drive the business that a Halo 2 drives.

JOHN MARKOFF: So another technology question. You haven’t said a lot about what’s in whatever this next product you have is but I think you have said publicly you have a relationship with IBM and IBM will be supplying something, probably won’t be an X86 chip.

ROBBIE BACH: That’s probably true.

JOHN MARKOFF: So how much risk is there — and I also heard I think you’ve told me it’s not a Cell, I think you’ve said it’s not a Cell Processor, it’s not going to be the same thing that’s going to be in the Sony, so we’d sort of put a box around it. But you may have to emulate the last generation of games, that’s one possibility. That to me seems like risk because you’ve got to be able to carry your legacy base of software forward. Do you feel confident you’ve nailed that?

ROBBIE BACH: Well, certainly the industry lingo around that would be called backward compatibility and we haven’t — this will be sort of like some of the other questions you might want to ask — we haven’t actually talked about it publicly yet. And so we have to — that’s some of the topics we’ll be addressing probably at E3.

JOHN MARKOFF: So I’m not sure this is a fair question to ask either but particularly after seeing “Sin City,” I don’t know if anybody has seen “Sin City” —

ROBBIE BACH: I haven’t seen it.

JOHN MARKOFF: Well, then don’t. (Laughter.)

ROBBIE BACH: You saw the review here in The New York Times, don’t.

JOHN MARKOFF: This is a question about violence in videogames. Where does the industry stand now? Do you think that that problem has been solved?

ROBBIE BACH: Well, I think I’ll speak to it from an industry level and from a Microsoft level because I think they’re both important points to make. At the industry level our view is that the most important thing we need to do is have a great ratings system. And we have invested a tremendous amount of money and effort in creating what we think is the leading rating system in terms of our ability to get information to people about what’s in the games. Every game gets rated, retailers basically won’t stock games that aren’t rated, so all the games get rated. There’s a group called the Entertainment Software Rating Board. They do a set of ratings that has a scale not too dissimilar from the movie scale.

We go beyond that though and there are descriptors for each rating that say why it got the rating it did so you’ll see three or four descriptors that say it was because of language or violence or sexual content or what it is or comic mischief or whatever the thing is. And we continue to upgrade that rating.

JOHN MARKOFF: Is that really a category?

ROBBIE BACH: Yeah it is because what happens is why did something get rated T, which is the equivalent of PG, versus E? Well, it’s not because there was sexual content in the title but there might have been some mischief that people look at and say, well, maybe that’s not appropriate for a seven-year old. And so what you have to do is you have to continue to focus on that.

What we’ve done at Microsoft is we kind of hold two principles really close. The first is we believe in the First Amendment and we will defend that even for content that I personally don’t like. And so we have to believe that people who are creators can create the content that they imagine in their mind; that’s something that’s protected, it’s one of the rights we have as Americans and so we protect that pretty jealously.

At the same time, we will protect very jealously parents’ ability to manage what their children play. And so Xbox is the only console that has parental controls built in. So you can set your console to say, hey, I’m only going to play games rated this and below and anything above that we just won’t play. And you can do the same thing for DVD movies because we’ll play DVD movies as well, and we’ll look at the ratings and say, oh, that’s rated R, the parent didn’t want the child to be able to watch that and we won’t show it.

You have to be able, in our view, to do both of those things to make the entertainment industry continue to grow because the breadth of content, both stuff that is what you’d say benign and stuff that some people don’t like is just going to get bigger. And to be able to manage that appropriately is you’ve got to give people choices, you’ve got to give them information and then choices about how to manage it.

JOHN MARKOFF: But is it sort of falling off the radar to a certain extent as a political issue?

ROBBIE BACH: No, it’s absolutely not off the radar as a political issue, certainly at the state level in particular you see a lot of activity. There’s a bill in the state of Illinois right now, there’s a bill in the state of California, there’s probably 20 if you went around state legislatures of varying degrees of requiring information posting all the way to, no, you can’t sell M-rated games. And all of the bills that are at the far end of that extreme…have been…anything that’s gotten passed has been ruled unconstitutional. I think that’s the right ruling but that process hasn’t stopped.

JOHN MARKOFF: Another technology question. One thing I find curious about your business sort of as someone who’s hung around Silicon Valley for a while is that I think maybe even with the last Xbox if you counted the cycles in that device and you compared it to a PC at Frey’s, my bet is you would have had more cycles in your device than they had in theirs.

ROBBIE BACH: You mean in terms of usage or in terms of —

JOHN MARKOFF: Just pure computing cycles, computing power. What’s yours selling for now, $179, $150?


JOHN MARKOFF: $149 and they’re still up around a thousand dollars. To me that’s kind of this disconnect and it’s going to be accelerated in this next generation I would imagine.

ROBBIE BACH: There are two very different things going on though. First of all if you took a PC today and compared it to an Xbox in processing power, the PC blows it away by a factor of about 10.


ROBBIE BACH: Well, it’s a 733 megahertz —

JOHN MARKOFF: Even if you include the graphics processor?

ROBBIE BACH: Even if you include the graphics processor.


ROBBIE BACH: And remember that the way graphics processors and CPUs work in a game console is very unique to gaming. And so it may be optimized for doing the types of things we do in gaming but it’s not optimized for doing technical calculations or CAD drawing or a bunch of other things that a PC is used for.

So our view is that the innovation driver in this space is the PC and will be the PC going forward because that’s where all the technology — I mean, if I think in my brain about some of the advanced technology we’re working on, lots of that technology has been brought forward first on the PC and then gets price managed, price reduced and then we’re able to incorporate into what we do.

Remember that we’re basically a special purpose device and so we can optimize around specific things but if you wanted to do general purpose things using Xbox like processing people would be sadly disappointed. It just wouldn’t do what they wanted it to do.

JOHN MARKOFF: So you’ve been on both the Office side, you ran Office for, what —

ROBBIE BACH: I ran marketing in Office for five and a half years.

JOHN MARKOFF: — five and a half years. How different is your life now than your life then?

ROBBIE BACH: Well, it’s a little different when you go from marketing Word and Excel to working with Outkast and Incubus on new music promotion. (Laughter.) It’s a little bit of a different spectrum. So certainly I go from doing IT presentations to CTOs who come to campus to doing meetings with sports personalities and things like that, so it’s a very different world.

There are some things that carry across. Good value proposition and the basics actually aren’t any different. You’ve got to reach out, figure out how to reach customers, you’ve got to have good value propositions, got to do a good job communicating but certainly the culture around it is very different.

And the thing about the brand work we do, you know, the brand work we do to build the Office brand and compare that to the brand work we’ve been doing to build the Xbox brand, I mean, you would never launch Office on MTV, right? It would be a funny disconnect. But certainly for what we’re doing for the next generation MTV makes logical sense.

JOHN MARKOFF: So since you don’t want to talk about unannounced products, let me ask this in a slightly different way. Do you think it was a mistake to put a hard disk in the last generation Xbox, if you could have done it over again?

ROBBIE BACH: No. What you have to think about when you think about the choices we made in the technology for Xbox is you have to go back and realize we started that project the day Sony — basically the day Sony launched their product in Japan. We had 18 months in the development cycle. We knew we were going to be at least a year in some markets and in some markets two years later than Sony. And so we knew we couldn’t come to the market with a product that was a “me-too” product. Me-too two years late doesn’t actually kind of get the game. And in particular in our business me-too two years late means more expensive, too, so that’s not a value proposition that’s going to work.

So we said, look, we have to figure out how we add value and how we differentiate. And we did a graphics processor that was very, very powerful and that has helped differentiate us. The hard disk has helped differentiate us because games have been able to use that disk to create an experience on the box that you can’t do with a machine that doesn’t have a disk.

So I don’t think that was — you know, everything is based on where you were at the point in time and the circumstances you were working with and the market forces you have to deal with. I don’t think that was a mistake at all.

It doesn’t mean neither pro or con what we will do in the future, but certainly you kind of have to go back in history and say, OK, that’s the logic, the logic was right and I think it absolutely helped us.

JOHN MARKOFF: I haven’t asked you about your other business.


JOHN MARKOFF: So two questions: First of all, can you sort of walk us through the other half of your business and then how much of your time goes into each? I mean, is it 50/50 or is it —

ROBBIE BACH: Sure. The Home and Entertainment division basically has three businesses in it and I run the Home and Entertainment division. The first of those, which we’ve been talking about principally, is gaming, whether that’s Xbox or Games for Windows, so I’m certainly responsible for that.

The second business is actually a business predominantly done and developed down here in Silicon Valley, MSTV, and they’re working on products, software infrastructure products for the cable and telco industry for video presentation in the home. We have a product called Foundation Edition, which Comcast and other cable companies use, and we are working on a product in the IPTV space that SBC has announced they’re going to use and several others are trialing. So that’s a really good business for the future we think and a business we’ve been investing in.

And then the third business is what we call our Home and Retail division. They produce mice, keyboards, Office [for the Mac], consumer software that sells at retail, Microsoft Money, digital imaging products, Works, those products.

JOHN MARKOFF: Not your mobile entertainment products?

ROBBIE BACH: Not mobile entertainment, not mobile entertainment.

JOHN MARKOFF: That seems like you could make a case that mobile entertainment —

ROBBIE BACH: You could, but you can also make the case that, for example, our Smart Phone work is mostly an enterprise business not a consumer business. I mean, yeah, you could draw that line and at some point you have to draw a line.

So if you think of how I spend my time, the vast, vast majority of it is spent on the gaming side of the business. It’s a big investment, we’ve been working on that for a while. I have two really capable people who have been running the other two businesses and doing a great job. Moshe Lichtman runs the MSTV business and really has taken that from a very small sort of startup operation to something now which we think has tremendous opportunity and potential in front of it.

And Lisa Brummel, until she was promoted to run HR at Microsoft about four days ago, ran the Home and Retail division.

So it’s a small percentage of my time, but an important part of our business.

JOHN MARKOFF: You must remember Cablesoft.

ROBBIE BACH: Yeah, I do. (Laughter.)

JOHN MARKOFF: Cablesoft was Microsoft’s initial foray into this space that you’re now still foraying into, how many, 12, 13 years?

ROBBIE BACH: It’s been a while.

JOHN MARKOFF: So a couple of questions. One is sort of, this is a slice-the-pie question. You could argue that the Xbox sort of could play in that space and you’ve divided this space so the Xbox — aside from playing DVDs and I guess music now — is largely a single function device.

ROBBIE BACH: That’s right.

JOHN MARKOFF: Why not add in set-top box functions, for example, or interactive Web?

ROBBIE BACH: I think the first thing you have to recognize is for each of the businesses they have to be great at what they do, and so our No. 1 priority is making sure that Xbox and its progeny are great videogame consoles and that the MSTV work that we’re doing around Foundation Edition and our IPTV product are great at what they do.

How does that evolve over time? As you pointed out at the very beginning, who knows what will happen over time. But people who try to be all things to all people don’t do well. And so our focus has been be singularly focused on making sure we produce a great TV experience with the TV products and be singularly focused on making sure we produce a great console experience with our gaming products.

Without that foundation and without being successful in both those businesses at a foundation level, the rest is just speculation.

JOHN MARKOFF: I’ve got to ask you about the business side of your business because, when you began to break out, you guys have lost a serious amount of money over a serious amount of time. Do you think you could have — I mean, would your business have been viable if it wasn’t in the context of Microsoft? Could you have done this if you weren’t a division of a company that has these two great businesses?

ROBBIE BACH: Well, set aside Microsoft for a second, it’s clear that if you wanted to enter the videogame space it’s oddly a capital-intensive effort. People don’t think about it that way and you could spend the capital in different ways. Sony spends it in foundries and they have a lot of capital tied up in foundries. For us we chose this generation to have effective investment tied up in selling the box where we didn’t make money on the box and that was our way of investing. But in any case anybody who wanted to enter this space it would require a lot of capital. That’s just a sort of fact of the dynamics of the industry.

So in a way the answer to your question is, yes, Microsoft has the capital to be able to do that, and there aren’t very many companies in the world that probably do.

Also there aren’t very many companies in the world who have the strategic imperative to want to go do that because it is an investment that has associated risks with it, and I think most people would say, hey, that was a risky thing, we would say yes it was, but it was important to us strategically and we hope that that strategy play is going to pay off.

JOHN MARKOFF: Turn the crank a couple generations. Will there be three players?

ROBBIE BACH: Good question. There are two forces at work about whether there will be more players in the future. The first force is the business is evolving and as it gets — it started literally as a 6 to 16-year old business and was closer to a toy business than it was to a consumer electronics business. You go back to your Atari days, I mean, that’s basically where it was and the average age of the gamer was 10 or 12. The average age of a gamer now is 28, so the business clearly has changed. (Laughter.)

JOHN MARKOFF: I’m still too old. (Laughter.)

ROBBIE BACH: Yeah, the business has clearly changed.

So there is the factor that is changing that business. What that does it has two implications. One, the companies in the industry have to be able to change with those demographics successfully, and, two, it creates more opportunity because the market gets bigger. And how those two things balance themselves out is going to determine how many players there are.

I mean, to be frank, Nintendo is a great company, but they have focused on the younger audience historically. And they have an amazing brand, very powerful brand and very powerful content; the challenge for them is how do they take that content which skews younger and that brand which skews younger and skews more into the toy category and whether they decide to dial that up into the interactive entertainment category.

Sony has a different set of challenges balancing out the things they’re doing in their business and Microsoft has its set of challenges, too.

JOHN MARKOFF: Do you know Sir Howard, the man who is running Sony?

ROBBIE BACH: I don’t, I have not met him yet. Obviously the folks at Microsoft know him well, and we have met with him a lot in his former role in the music and movie space. But since I’m not in the music and movie business, I haven’t met him yet.

JOHN MARKOFF: Well, I want to open this up to the audience but first I was given a series of questions by e-mail and I want to ask some of them. The first one is what’s the latest update and overview on “Longhorn.”

ROBBIE BACH: (Laughter.) Wow, I’m probably not the best person to provide the update on “Longhorn.” We’ll have to arrange another breakfast for that.

JOHN MARKOFF: But am I right, did I read that it’s December ’06 that is now the target date?

ROBBIE BACH: To be honest, I don’t know. I haven’t seen the date.

JOHN MARKOFF: OK, it’s another business.

ROBBIE BACH: So yeah, it’s clearly not my business. The only part of it that’s my business is when it’s ready my retail team will sell it. (Laughter.)

JOHN MARKOFF: So you’ll let us know.

So here’s one that’s interesting. What can industry leaders do to prevent piracy of content? What are you doing?

ROBBIE BACH: Well, I think there’s kind of two things that people need to think about when they think about piracy of content. I think the first is there are technical things you can do that are smart and rational and legitimate in terms of protecting content and certainly we will — take Xbox as an example, we have piracy issues that we have to manage against. Certainly we will work to protect our content. We believe in the value of IP as an asset and that it’s a legitimate asset to protect, just like you would lock the doors on your building. And so we think of that and we will work hard. We have some of our best engineers, both software and hardware, focusing on making sure that there is real security built into the product design and into what we’re doing. So that’s absolutely important.

I also think it’s important that if you’re in the content business you don’t get stuck in the just-build-walls mentality, because you have to realize that the market does change and business models can change along the way. I think the DVD business at retail is the classic case where the movie industry fought like mad, all the way to the Supreme Court, in fact, to try to prevent people from being able to rent movies and/or buy movies. And it turns out now that’s their business, their business is selling DVDs. They make way more money selling DVDs than they do in the movie theatres.

And so you have to do both things, you have to protect the IP and be open to change that can actually be better for your business. And I think if you’re really forward thinking you’re trying to drive that change while still protecting the IP rather than resisting it.

JOHN MARKOFF: How much of your business is a rental business?

ROBBIE BACH: It’s a small part of the business today.

JOHN MARKOFF: But they are available?

ROBBIE BACH: They are available, yeah.

JOHN MARKOFF: But most people buy.

ROBBIE BACH: Yeah, most people buy. One of the things that’s different in our business from the movie industry is ours is repeat play, so the actual number of hours you get out of buying a product is longer. And you might play it on Monday and then you want to come back the next week and play the next part of it, so it makes it a little harder as a rental market. Rental tends to be for us trial more than anything else.

JOHN MARKOFF: So let’s see if we can understand this question. What is the best strategy for a unified user interface for the multiple devices that we can use to view entertainment content? That’s a tough one. Have you thought about that at all?

ROBBIE BACH: Yeah, sure, but you think about — I get asked the question a little bit differently sometimes, which is how do you feel about convergence and how do you think about convergent devices.

And in general I’m not a huge fan of convergent devices in the strictest hardware sense of the word because I think what ends up happening is the device has multiple masters. And when you start talking to the development team they want to say, OK, so help me make some tradeoffs because you’ve given me a date objective, a cost objective and you tell me that you want me to do everything. Well, that’s not possible, pick a few. And the minute that you start making those tradeoffs the device becomes good at some things and less good at others. And then the consumer looks at it and says, well, it’s a great telephone but it’s a crappy toaster and I don’t want a toaster/telephone, just to pick a weird example.

And so what you have to do in those devices is you have to decide what things are complementary functions where you can produce a great consumer experience across a set of things and what things aren’t, so that’s the first part. And then the second part is we distinguish between what I’ll call hardware convergence or device convergence from experience convergence and we think there is a lot of opportunity for experience convergence. I’ll pick an example from our space. Today you point out that we do play music but we’re not really the place where you want to rip your music collection. We’re a specific purpose device attached to the TV that’s not the logical place to store your music. The logical place to store your music is on a PC someplace in the house.

So what we think of is, well, people want the music experience while they’re playing a videogame, but I can’t produce a device that by itself can be a great music device, so what we enable is for you to across the network see your music on the PC and play it from the PC.

JOHN MARKOFF: OK, let’s push back at your other two businesses. I don’t think I got this. So you’ve got this IPTV business, you’re acting as a conduit, you’ve got this device that has high bandwidth and talks IP. So is there any kind of synergy between the Xbox going forward and this channel that you’re building into the home?

ROBBIE BACH: Well, I think the real point goes back to a little bit of what I said before, which is the challenges around IPTV, that is like a tertiary- — or whatever the word for quad is — level issue. The bigger issues are how we make sure we give people a great high definition experience with the ability to control the experience themselves across a broadband connection with what is effectively a client/server technology. I mean, we’re so early in the business that it’s hard to even see how those things could evolve.

JOHN MARKOFF: IPTV demos very well. I’ve seen it for the last two years at CES. Is there any place I can go in the United States today and actually buy it as opposed to test drive it?

ROBBIE BACH: There isn’t anyplace in the U.S. at least for our product that you can go and buy it as a commercial release. SBC has announced that that’s what they’re working with us on but they haven’t done it. We’ve done trials in probably 10 markets around the world with real consumers, so we know how the experience works, but you can’t go into the store and buy that.

JOHN MARKOFF: OK. And to make it a workable consumer product let’s say for NTSC video, what’s the minimum amount of bandwidth you can get by with to the home?

ROBBIE BACH: Well, I’m going to let the telcos answer that because their answer is going to be different depending on the telco who owns the technology, in part because some of them will use different compression approaches, and bandwidth is tricky because you can say bandwidth to the nearest head end and then you can say bandwidth to the curb and then you can say bandwidth to the house, and it turns out each one of them is going to be different and the telco providers, at least at this stage, are each approaching that differently. So that’s something that’s going to evolve.

JOHN MARKOFF: To be determined, OK.

Well, let’s throw it open. How about some questions from the audience?

QUESTION: (Off mike).

ROBBIE BACH: Well, so the question is about the PSP, which is the device Sony just shipped in the U.S. a little while ago, which is a handheld gaming device and potentially music and movie player.

My response to it is it’s a beautiful device, great industrial design, it’s a good device. I think so far people like it as a gaming device. We haven’t shipped enough and gotten outside the core audience yet, so you don’t really know how far that is going to carry you. But certainly with the core audience the feedback we’ve seen is that people like it as a gaming device.

To my point about multifunction device, I think they had to make some hard decisions relative to doing music and movies and I would say it’s probably not very strong in those capabilities today. You can, in fact, do it but you’ve got to buy a separate UMD disk, which means the studio has got to put movies on that disk and there’s no permanent storage on the device so it makes music storage a little tricky.

So in some ways it’s sort of a mixed bag I’d say. As a gaming device I think it seems to be off to a good start and it certainly seems well designed, as a multifunction device I think they struggle with the same things I talked about earlier about having to try to do multiple things.

JOHN MARKOFF: If they’re a half year late or something after you into the market with the next generation, will PSP provide them with a little bit of defense in the market?

ROBBIE BACH: Well, I don’t think so. Historically the handheld market and the console market have been pretty separate. Nintendo has tried for a long time to figure out ways to convince people that because they own their Nintendo handheld that they should buy their console and that hasn’t been successful. People sort of think of them as different products for different purposes. So I think people will see them as a separate entity.

QUESTION: As a parent I’m concerned with how much time my son spends on the games. Has Microsoft done any studies on those habits, the time spent on the games in this generation and the next generation, they’re going to put our youngsters into a disadvantage compared to other countries when they’re spending less time playing games.

ROBBIE BACH: So the question is about time spent on playing games and have we done any studies about how that affects kids and what that means for global competitiveness. (Laughter.)

So I think the answer is a couple-fold. There’s been a lot of scientific research done. It is behavioral and anthropological or sociological in nature and I think the data is mixed; I’ve seen both. I’ve seen people who say it improves concentration skills, it improves hand-eye coordination, it improves focus. I’ve seen people who say it’s distracting and does things that aren’t good. So I’ve seen both and it’s good scholarly research on both sides of the issue.

To me it’s like most other things, it’s about doing it in the appropriate amount and with the appropriate moderation. So in my household, I mean, I’m the guy who runs the Xbox business, my kids don’t get to play during the week, that’s just the rule in the house and that’s the way it is. On the weekends if they have some free time they can play, but they’re so busy on the weekends it effectively manages the amount of time they play. And they self-select on the weekends with their free time. But during the week that’s not the time.

So to me it’s like television, it’s like watching movies, it’s like listening to music, how much time do you allow them to do it and what impact does it have.

And the other thing I will say is the part about it that I like is it is a social experience. I compare it to you asked the question so how is it different than the kid sitting down and playing monopoly. If my son has friends over and there’s three or four of them playing a videogame, I think part of it is they’re playing the videogame but the videogame is just context for them to have fun together and the same thing is true of any other kind of game you play. And as long as you decide how much time is appropriate for your kids I think it works great and I think it can be beneficial and a positive part of what they do. If you’re in the mode of just letting them do whatever they want, that may or may not be fine, as the scientific evidence displays.

QUESTION: (Off mike).

ROBBIE BACH: So a couple points, sort of the irony, Samsung is in the business. They’re the largest parts supplier probably in the world to both us and Sony in terms of components —

JOHN MARKOFF: Arms dealer.

ROBBIE BACH: — DVD drives, hard drives, memory. I mean, they’re in all the component businesses. So in some ways they’ve chosen their way. I won’t speak for Samsung, maybe they’re planning to enter the business, I don’t know, but they certainly have chosen a way to participate in the business without being a console provider.

So I don’t think it’s impossible for somebody else to enter but it takes a bit commitment. You’ve got to develop a content business which has got to be able to produce games. That’s not trivial, it’s really hard. You have to be able to produce great hardware, not trivial. You have to be a great software company, you have to be able to produce software tools. It’s a complicated business and it’s a business that has high reward, probably 40 percent of Sony’s profit comes from PlayStation, but it also has risks. And so I think different people will choose different ways to be involved in the business. Samsung as an example is a big provider of flat screen and high definition TVs. They are going to benefit from the next generation of videogames because the next generation, certainly our next generation videogame is going to be a killer application for HDTV. So they’ll play a role in some shape or form.

QUESTION: In the original Xbox I think the cost, the build cost for the Xbox was somewhere around $400 to $500 if you look at the component cost. You were selling it at $199, $299. Now you’re saying you’re going to $149 and you’re going to improve the capabilities of these boxes. (Off mike). So in the old days the thought was kind of in the good old days of the Internet, okay, we’ll sell five games to cover the cost of the box. Are you hitting those kinds of objectives on this where you can cover the cost? Or if I could boil down the question, is anybody really making any money in the game business or is this kind of another one of these things where the only guy that makes money in Silicon Valley is the real-estate guy? (Laughter.)

ROBBIE BACH: You have an edge to that question obviously. (Laughter.)

Well, so a couple of just factual things and then I’ll talk about sort of the prognosis. From a factual perspective the cost of producing a box changes pretty dramatically over the lifecycle of the product and so, in fact, as our prices have gone from$ 299 to $199 to $179 to $149, our cost of producing that same product, which has exactly the same performance, has dropped dramatically as well.

The second fact is we do lose money on the consoles. That’s not new news, it’s been widely reported. And so even though we’ve been reducing costs we’ve been reducing price so in some ways we’ve been sort of playing the same game throughout the cycle.

In terms of games sales, we’ve been very successful on the console in games sales. I think our what they call attach rate is, depending on the market you’re in, somewhere been seven and nine games per console, which is industry leading at this stage in our lifecycle so we’ve done very well at that.

In terms of whether people make money in the business, yeah, people make a lot of money in the business and people lose a lot of money in the business. There are, you know, take Electronic Arts, a great company, they’ve made a lot of money in the business. They’re very smart, good management, done a good job. Sony has been successful because of the scale they’ve gotten their console business to, they probably break even or make a little bit of money on their hardware plus or minus, that’s not the big part, but then when you put the software attach and the money they make on software on top of it it’s a really good business for them.

So it can be both, it’s like anything else. It’s a business where there’s absolutely money to be made, it’s a business where the swings in what is a good business and a bad business are fairly fine tuned and fairly large in terms of how they swing, because you start multiplying a $10 mistake in cost of goods, you start multiplying that by a lot of units and it tends to add up to a lot of money really quickly, so you have to be very smart about how you manage the business.

QUESTION: (Off mike).

ROBBIE BACH: Well, I certainly think that the future of the home, again you’ve got to project out five, 10 years, is going to be a networked arena. You’re already seeing that happen in more high-end locations, you’re going to see that continue.

I think you will want someplace in the home that is a central repository because so much of what we’re talking about is digital assets, you want a place to store them, you want a place to edit them, to categorize, organize, the equivalent of creating playlists with music, all those kinds of things you’re going to want to do.

So I think there will be a central repository. Do I think there will be ways for devices to talk to each other that don’t require them to go through the central repository, sure, I can think of some examples where that might work but I think nevertheless it’s sort of like the airline model where they have a hub and spoke model and occasionally there’s direct flights without going through the hub. I think you’ll see the same thing develop over time in the home.

QUESTION: (Off mike).

ROBBIE BACH: Well, I think the thing we’ve done — one of the other roles I play at Microsoft is I’m the co-chair of what’s called the Consumer Leadership Team and our job is to look across all the consumer businesses at Microsoft and say how do we create those common experiences. And so our job has been to identify experiences, independent of hardware versus software, but just what does the consumer want to do or what do we think is possible even if the consumer doesn’t know about it today that could be a cool experience in the future around music, around gaming, around TV and video, around digital memories, around communication, and so just to give you some examples of the types of experiences we look at. And then we try to identify, OK, what role does each part of the company need to play to make that come alive.

And what you’re going to see just like anything else this is something that’s going to evolve over time. We can’t stop the development teams and say everybody stop, we’re going to go do this experience and that’s all we’re going to do because they have specific things in their business that they need to drive that are critical for their day-to-day business, if you want to think about it that way.

So what happens over time is we each have a vision for where we want to end up and we start building in functionality, doing things together, you reach that vision and a few years out some cool experience comes to fruition.

Take the example of the thing I talked about with Media Center PC and being able to remote that on an Xbox. That’s something we started talking about three years ago. And the Media Center team did some work, they’ve obviously been shipping Media Center in the meantime and doing new Media Center work but they’ve been doing work to enable this in our product. And you can actually buy it for today’s Xbox, you have to buy a disk but you can go buy a disk and put it in and we’ll do that experience in a great way.

So I think you’re going to see this be an evolutionary thing. What will end up happening it’s like what happened with Office from my prior background. People will look back on the ten years from now and say, wow, a revolution took place. And somebody will say what day did it happen on and they’ll say I don’t know but it happened over that ten-year period and I know things today are radically different than they were ten years ago.

I started working at Morgan Stanley as a financial analyst. I didn’t have a PC. I did spreadsheets with an HP12C and 15 people 24×7 in a Wang word-processing room with those big, widebed word-processing things and then you manually checked it.

JOHN MARKOFF: Which brings to mind this current Microsoft Office commercial that’s running. Do you have any qualms about portraying your current customers as dinosaurs? (Laughter.)

ROBBIE BACH: Hey, look, the good news is I work in the Home and Entertainment division, not the Office division. (Laughter.) So I’m not going to speak; the Office guys, I’m sure, have good sound logic behind the campaign, so I will leave that to them.

But to finish my point, I think it is one of those things that will happen over time and that you’re going to see when we look back 10 years from now, just as we’ve had a digital revolution in business, there is a digital revolution happening in the home and people will look back and say, wow, things have changed.

QUESTION: (Off mike).

ROBBIE BACH: When you say get out of the loop I’m not sure what you mean.

QUESTION: Well, you’re not making money in the hardware. (Off mike).

ROBBIE BACH: Well, it varies by area in the home. So as an example I’ll take two examples. In the videogame space the hardware tends not to be where people make money. The way the business model works is you try to, as Sony has done, break even on the hardware, maybe make a little money, maybe lose a little money, and then you’re in the software business as well. So when our publishing partners produce a game they pay us a royalty, when we produce a game we obviously sell it at margin. And the place you make money is in software and services where the hardware becomes an enabler.

And you have to think about it as an integrated ecosystem. I don’t think about it as, oh gosh, I’m losing money or making money this month on hardware, I look at the combination of what I’m doing with hardware and software and services and say, how am I doing.

Take the music space right now, Apple is making a lot of money on the hardware and they make some money on the content, but at 99 cents not a whole heck of a lot. And so there’s different business models that are going to play out in different scenarios and you have to think broadly about the whole business and not focus too much on any one stream.

JOHN MARKOFF: A couple more questions.

QUESTION: (Off mike).

ROBBIE BACH: Well, the question is about the ongoing discussions about Blu-ray technology or blue laser technology and how we manage that relative to what we’re doing.

Certainly in terms of what’s going on Microsoft as a company is a participant in those discussions and particularly from the software standards perspective, the Digital Rights Management technology that’s being used, the compression technologies and Codec technologies that are being used in those standards, so we participate in those fora actually quite actively and certainly talk to all the different participants. And we’ll keep engaging with that.

I think it’s a little bit the industry has gone through these things where there have been competing standards for a while; this is just another phase of that and the industry participants, particularly on the hardware side, will figure that and that will become apparent maybe soon, maybe it will take a long time, it’s hard to tell right now.

In terms of how it affects our business, it’s like anything else. I could probably point out four or five different inflection points that could happen tomorrow, next month, a year from now that we have to manage for and we have to make decisions about what we’re going to do relative to that. And so this is just another in the list of things we have to think about and consider.

And I also think this is one of those things that’s going to play out over a much longer period of time and the fact is the content companies are selling a ton of DVDs today and they’re going to want to keep doing that for as long as that business can generate profits. And then who knows what will happen in the next generation. It might be a next generation disk format, it might be more like music has become where it’s a different format for the business. We’ll see how that plays out.

JOHN MARKOFF: One last question.

QUESTION: (Off mike). (Laughter.)

ROBBIE BACH: I love it. We haven’t announced the next generation and we’re already onto the next generation.

But it’s a fair question in the sense that these things take time and we’ve been working on this next generation product for over three years, so basically pretty much after we launched the last generation a group of people started working on the next generation.

I think the only way to answer that is to say that we are going to continue to invest in this space. We’re very excited about the opportunity we see, we will continue to invest there, not just in the hardware part, which you might think of as the console, but in the software, the tools and the services aspects of it. We think there is another 15, 20 years of really cool innovation that’s going to happen there that we can see just in our mind’s eye and as resources become available people will start thinking about the future.

The other point I’ll make, one of the trends in our industry that I think is exciting is as it’s moved from being almost all hardware based to being hardware and software based, a lot of the innovation can happen over time without requiring a completely new set of things. So take, for example, Xbox Live, our online gaming service, that didn’t exist when we launched Xbox but we created a whole new experience on Xbox in software. And so I think what you’re likely to see is, sure, there will be a next generation at some point but you’re also going to see innovation happen along the way more and more frequently because software has the magic to be able to do that seamlessly without requiring big industry shifts on the hardware side.

JOHN MARKOFF: So it’s 8:30 and I think Robbie has got to go, but the generational shifts are the best time to follow these things and so we’ll look with interest on May 12th, right?

ROBBIE BACH: Yeah, May 12th, 9:30, MTV, be there! (Laughter.)

Thanks very much.

JOHN MARKOFF: Thank you. (Applause.)

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