Yesterday afternoon Joystiq editor Ben Zackheim and I sat down with Microsoft CEO Steve Ballmer to discuss the Xbox 360. We talked with him about what he thinks it's going to take for the Xbox 360 to be a success (he thinks they're going to swipe the top spot from Sony), his take on the PlayStation 3, why we might see one or more new versions of the Xbox 360 next year (hint: never say never to a next-gen optical drive), Microsoft's plan for backwards compatibilty, some more details about the new console's integration with the iPod and the PSP, and how all of this fits into Microsoft's living room strategy. Also present for the interview was Chief Xbox Officer Robbie Bach.

Steve BallmerThe first question is one of the obvious ones, but are you a gamer?

Am I a gamer? Casual. I'm the father of three boys who are not as casual as I am.

What do they have?

I've got three different age ranges. I've got a thirteen year old, I've got a ten year old, and I've got a six year old, and they're all in different phases of life. The thirteen is kinda classic. He's sort of a first person shooter guy more than anything else. The second is a sort of a massively multiplayer game type guy, mostly PC-

Yeah, you're talking PC so far, huh?

No, no, no, my first guy is almost all Xbox. My second guy is almost all PC, with a little bit of Xbox. And I've got a six year old and he's actually a little PC-these sort of lightweight kind of cheap games you get online on the PC. And there are a few games he likes on the Xbox.

Do you play with your son on the Xbox?

Yeah I do a little bit. I do a little bit. But, you know, I have nowhere near the agility or capacity to learn which I should at my advanced age, I'm afraid.

Have you gotten any time with the 360?

Well, with the box itself? Yeah. Obviously we're not sort of in full play, but production mode...

But did they let you bring one home?

No. Well, actually that's untrue. I have the silicon at home. I was with the silicon team last week during this MTV thing and they gave me one of each of the chips to take home in a little case, so I do have those. My sons were kind of impressed, I'll say.

Pulled some strings, huh?

Yeah.

How are you going to define success for the Xbox 360?

Well, I mean in the simplest of ways. I'll start very simple. If Peter Moore (who runs our marketing) was here, he'd tell you about brand and positioning and image. I just want to sell more consoles than anybody else in the next generation. And in the simplest of ways, you know, the number of units we sell is really important to me.

So you have to grab at least 50% of the market for this to be defined as a success?

xbox 360 and controllerI wouldn't go quite that far, but I think we will. I think we're going to have market leadership in this round. The big question is how well do we do in Europe. I feel quite comfortable we're going to do well in the US. Sony's going to outperform us in Japan. We're sort of doing well in all of the other markets relatively. And the question is how well will we do in some of the big European markets. And how well do we do broadening out the base? We're not going to abandon in any sense, the hardcore, the faithful gamers that have brought us here, but you know, as I think we made clear in the session last night, we are going to try to broaden out and get a new class of people involved with the console this round.

Yesterday Sony unveiled the PS3, and at least on paper it seems to outclass the Xbox 360 in terms of teraflops and support for 1080p, and it's going to have a next-generation optical drive which the 360 isn't going to have—

No... we just haven't announced anything yet. Sony may have announced a non-standard drive last night. We just haven't announced anything.

There are going to be some more surprises on the hardware end?

Could be! Look, for us to say we're going to go through a whole generation without an HD capacity drive—I think that would be naive to assume that we'll be sitting here at the end of the Xbox 360 generation and no such device will have shipped. On the other hand, we haven't announced anything, Sony's announced something, and who knows? You know, they could have announced support for Beta instead of VHS. We're trying to watch and really be agile on our feet, relative to the issues between HD DVD and Blu-ray. As a platform provider we're trying to make sure our software standards are well-supported in both places. As the provider of the Xbox, we're sitting there saying, "Look, we're shipping NOW." This was not an option. Neither one of these things were an option for our first shipment, so it's kind of a moot point. Sony's saying, "Who knows what the standards are, but we're going to commit to what we're going to commit to." I think we can be nimble and agile and that'll be important.

So there's a possibility of an Xbox 360 Mark II coming along?

I won't hypothesize on how we get there. I just think it's just wrong-minded to think that somehow we'd go a whole generation without this. We're not going to be sitting here five years saying, "Oh jeez, we don't have HD DVD-type storage." But we're going to out perform Sony in a lot of things. We're faster on integer than they are, they're faster on floating point than we are. To sit there and just take a look and say "Well, they're just faster..." Well, we've got three cores, they've got one core. Actually, we were pleasantly surprised by what they announced. They're later, and yet we think we're going to outperform them on a bunch of stuff. We think we've got better balanced system performance than they do. Now, when you're the second guy of course you're going to be faster. We sit there and say "There are some things [on the PS3] that are faster... [whispers] but there are some things we're faster on, too."

How much of an advantage does being first this round give Microsoft?

If we execute well, we think quite a bit. Just as being first gave Sony something of an advantage the last round. If we execute well, we're first to critical mass. And that matters a lot with the publishers, that matters a lot in terms of consumer word of mouth broadening out interest. We think we're going to be very, very competitive. We think we've got the fastest system even despite the fact that we're coming out first. We think there are a lot of advantages in being first. We've been targeting to come out this holiday, the holiday of '05. In the game theory of things, we assumed there was some probability Sony would match us, and probably a higher probability Sony would come later. And we said, "I hope they come later," because we'd see all the advantage of being first.

What has Sony done right?

Sony's a great company in many ways, and they're going to engineer something that's got some decent capability. There's no doubt about that. They have partners that have succeeded with them. I think we're doing a really good job of nurturing some of their partners. Their box didn't look bad, it looked ok—but I like our better. It's a little bit hard for me to laud the competitor, but Sony's a good company, and we have to assume that they're going to execute some things quite well. I was shocked that they didn't have more to say about online [gaming]; I just think of online as pretty fundamental at this stage. They didn't have much to say about online, and what they said was more than what they've said before, which I think is an interesting thing. We're both pretty keyed up on HD games—you can take the format and the disc aside—but we're both pretty keyed up on HD games. Of course we love what we're doing with personalization, but they were mostly about performance in their discussion last night.

Have you seen the game clips that they've released?

I haven't because I just came down today, but I'm sure competitive intelligence will be sharing those as broadly as they can. [laughter]

Regarding backwards compatibility, it seems like that's going to be on a kind of a selective basis from what we gather—is that correct?

We are working very hard to get compatibility. Of course the prioritization in our technical work is in the leading selling games from the first generation, just like the PS2 didn't run all PS1 games, it is unlikely we'll ever be able to say the 360 will run all Xbox 1 games. I think there are some games if we get them to run that means many, many other games will run, and I think rather than give some statement that is either too conservative (because the engineers can do better), or a bold statement we can't live up to, we thought we'd make our strategy clear that as we get further down the road and as our engineers do more work, the execution will speak for itself.

And there's also the possibility of patching over Live to allow for more games down the road—is that something that's being looked at?

Robbie Bach, Chief Xbox Officer: Sure, there's a number of different ways you can distribute the capability. The thing you have to recognize is we got to a point at E3 that we said look, there's so much speculation about this even though the work is ongoing, we should just deal with it and get people focused on the right thing rather than on the wrong thing. We wanted people knowing we're doing the work, but you don't want to say we're going to do every single game, because we don't know that to be a fact today.

Ballmer: We've actually dealt with this issue more than any other company in the world (with every Windows release). The truth of the matter is we run a high percentage of apps, and every Windows release we hear about the apps that don't run. But because there are fewer console releases than there are Windows releases, it's even more of a front and center question. But I think we have a pretty good sense of how to do this. Live gives us another asset to go after this, of course—we have a strong Live base, but it's still only a few million people at this stage, it's not all of our installed base, so we can't count on it as the only mechanism to try to get the strongest backward compatibility possible.

Will backwards compatibility be determined on sales if you proceed with the plan as you have? Will it just be the best-selling platinum hits?

I'd say it a little differently. I'd say what we will do is pick a set of titles and do all the technical work to get those to work. The truth is when you do some of those titles, you do get dozens to hundreds of other titles because you take any game that pushes the system and exercises it. If you can make backward compatibility happen for it, you'd handle any game that has a subset of what it does. So it's wrong to say it's about individual games, it's right to say we're going to prioritize the general purpose technologies based upon that which is in that league of games.

Bach: The other thing you can say is you can assume Halo and Halo 2 are fairly close to the top of the list... [laughter] for both the reasons Steve states. Because they're top selling games and they're some of the most technically complicated games...

Ballmer: ...so if you get those two, you'll get a lot of other stuff.

Xbox 360 gadgets
J. Allard touched on the issue last night on synchronization with the iPod and the PSP that the Xbox 360 is going to have, but he didn't really explain much about what form that would take.

Let's say... music, MP3s... if you have any music in AAC format there's not much anyone can do with it because Apple doesn't want anybody to do anything with protected AAC, so you take anything that's not in protected AAC format. We want you to be able to get that music over to the Xbox and enjoy it while you're gaming. So we're doing the work—whether it's with iPod or some of the other handheld devices—to move appropriate content back and forth. It's a nice thing. I think it shows our openness. It's good value for the consumer. I don't think it's big time rocket science.

Bach: Basically, anything that's unprotected. You know on the iPod, most music is unprotected, it turns out. So as long as it's not proprietary, based on something Apple's done, or any other music player for that matter, we'd like to be able to play it.

Ballmer: Yeah, 90% of the iPod music is unprotected, ripped legitimately (or illegitimately).

We wouldn't know anything about that [laughter]. Were there any mistakes made with the original Xbox that you learned from when it was time to start work on the Xbox 360? And if so, what were they? Give us the top three. Besides the design, that is.

In a way, yes. And in a way no. [chuckles] Sure, I actually think that in a way the design really worked for us in generation one. I mean everyone knows how to criticize the design. But in terms of really establishing us with the hardcore, our design was not all liability. It gave us a certain je ne sais quoi I would say. But we learned from the design, and we certainly learned financially about what sells, what doesn't, what drives value, what doesn't. So we were able to think that through in a different kind of way. So we know now what the value is of each component that we put in the system. Generation one, we just put components into the system because we were trying to get to market fairly quickly. So I think, you know, when we made the decision to go wireless we kind of knew what that cost would be and we could anticipate the benefit. We had a lot more judgment about that than we would have in any decision of that kind that we made. We had to decide how much memory. The decision to go to 512, that was a big, expensive decision that frankly was not where we were 3 or 4 months ago. So when we made those kinds of decisions I think we were a lot smarter. With 20/20 hindsight, maybe we would not have made all decisions the same. But I know we're making them smarter. That would be number two. Number three, the kind of content and content mixes that we need for different people, different geographies. I think we're a lot smarter about that. I mean we did a great job in the US and the English speaking countries like Northern Europe. I think we know we need a little bit different mix of content, and probably a little bit different marketing approach in France, Germany, Italy, and some of those countries. We certainly learned a lot about that in first generation.

Bach: The role of first party.

Ballmer: Yeah. That's right. What is the role? Our whole economic model and thesis, at least the one that got sold with the original business plan, has changed. Which is fine. I'm confident we'll have much higher unit volumes in the second generation and we'll also make a lot more money. We'll make money. And it will be a lot of money! As opposed to not making any money! We will make money, and a lot of money in this next generation! So [we learned] a variety of things.

You mentioned that you're probably not going to beat Sony on their home turf, but is there a specific plan to grab a bigger slice of the Japanese market?

You bet! This generation has given us real things to think about in Japan. We'll build some share in Japan and I think we're quite enthusiastic about that. We certainly have more good content lined up for the Japanese market, both first party and third party. That's exciting. When I say I think we can be number one this generation—and will be number one this generation—it's not because we're assuming we're going to get 45-50% market share in Japan. We'll get there with strong US performance, strong performance in Europe, and let me just say all the other markets except Japan. And we'll do better then we did first
generation in Japan.

Will you be distributing double A, triple A titles through Xbox Live? Not just arcade stuff, but actual titles?

I think current course and speed, titles are just getting bigger and bigger. So, the question is what will even be the consumer convenience? I talked to some publishers today who will tell you [in a "dude" voice] "Gosh man within two years we really do need massively more storage." And you know, which gets you back into the HD DVD format question, and when are we going to have the capacity? So, I can imagine more things getting sold directly. We're certainly going to support the consumer. Whatever the consumer wants at the end of the day we and our partners—retailers and publishers— we will figure out how to deliver to that consumer.

I think that those who predict that there will be a radical shift in distribution itself in the next few years, that's unlikely. The way games get played may shift quite radically. The importance of that online connection I think is just going to skyrocket! It will be because it changes the way the games are played and the way you work with other people. I think it will be important to some kinds of buying but I don't think it's going to dislocate today's existing model. I think there is still a lot of convenience to a GameStop, or a Target, or a Best Buy, or whatever your favorite choice is in terms of the experience.

Are there going to be multiple configurations for the box? Will there be version with a built in TV Tuner and an expanded hard drive?

[laughing] We love the one configuration we've announced and we're creative guys and I think you're creative guys and so the notion that there might some day be other configuration is eminently possible. It's a little bit like the discussion about HD DVD type storage. Will we have it? Sure. It's not like by the next generation there won't be a way to get massive storage on an Xbox. You'll get it. And there will be other configurations that come to market. When and how and exactly which ones... when there's news I'm sure we'll be happy to trumpet those. Right now we love our one configuration that we got in market for this Holiday.

So just one configuration is targeted for the Holiday release?

Yeah, given that we know we're going to have to hustle to produce all that people are going to want, that kind of keeps life a lot simpler for the retailers. If you said, "Look we're coming to market with three configurations, and we were in short supply, and we got the wrong mix of configurations," it would just compound all the problems. We're really quite excited about the proposition for having just the one configuration in market particularly for this holiday.

elder scrolls 4
There's a lot of talk about innovation on the 360, but the titles you showed Monday night were platformers, shooters, RPGs, nothing new. How can Microsoft help developers innovate?

Well, let me give sort of two completely different sides of the coin. Number one: we have to give an environment in which people can really do innovative things. Certainly the publishers I talked to today think we're doing a pretty fantastic job of that in what we have coming in Xbox 360. The live environment, the XNA environment, the hardware environment—I heard a lot of enthusiasm about that. Let's call that standard, normal stuff. The other thing we have to do, frankly, is tell the story. We've got to be there telling the story and showing those things which are more interesting. Whether it's a Spore or Kameo, which is a different kind of a game for the console world.

I think there will be other things that matter, and we gotta be willing to put our money where our mouth is both in terms of our own development and the promotion that we do with third parties. Not only are we very willing to do that, in a sense we have an incentive to do that. We have an incentive for people to understand that our platforms—because we have two of them, the Xbox and PC. Our platforms are the platforms where people are doing the most innovative games, some of the things you mentioned are clearly as PC centered as anything.

Bach: The other thing, think about things that are interactive entertainment that you might not think of as traditional video games. Take something just to pick a generic example, like video chat Texas Hold 'Em. Is that a video game? I don't know? Is that a broad game that a ton of people know how to play that would be really exiting and fun to do? The answer is yes. You get into the world of things that are completely new and have never been done before, and things that are just not thought of as video games that the environment really enables in addition to all the stuff Steve mentioned creating a canvas for people to innovate on.

Ballmer: Take today's passive video content, add a little interactivity to it. Take today's interactive content, games, and add a little bit more video sequencing to it. It gets harder and harder to tell what's what, but we want to facilitate the delivery of a variety of different forms across all our platforms, today with the Xbox more than anything else, but with Longhorn—and some of the investments we're making around Longhorn Windows and Xbox—again, I'll think you'll get an evolution in the set of genres that are interesting, whether it's because of Media Center and greater integration of the TV experience or because of some of these other things.

Bach: Just to give you a specific example, wouldn't it be cool to have the game that has the person on the PC being the general who is driving the strategy and the person on the console on Xbox Live executing the strategy. That is a completely new genre, not sure what you would call it, but that's a completely different experience, and it leverages everything that steve talked about that we're putting in place. That's the kind of thinking that we're going to get people to, whether it's first party or third party.

Look past the gaming aspects of the console, how does the Xbox 360 serve as Microsoft's beachhead into the living room. A 20GB hard drive isn't a lot of space for storage, but since it does have this broadband connection, how is it going to integrated with IPTV, streaming video, and streaming audio?

Three things: Number one, who knows what configurations will be there by the time we're done. I think that's important to say. Number two, because you do have the network connectivity, whether you have a Media Center PC or not. You can put an awfully big hard disk on a regular PC and plug into this ecosystem, we have plenty of extensibility in terms of storage. And then number three, you take the IP TV work we're doing, and that technology can run on a PC, on a set top box, it can run on an Xbox. So there will be, in conjunction with the work we do with the video delivery companies, particularly the telcos, who have tended to be our strongest customers for our IPTV stuff, there will be yet another way to acquire and use video content. So you have set tops, you have the set top experience, you have the Xbox, you've got a big hard disk, you've got networked to the PC in the home, so I think there will be a lot of ways to get that media onto the Xbox.

Is there a plan for people to be able to purchase TV shows or movies via their Xbox even if they don't have a Media Center PC?

Right now we're working hard with a number of partners, like SBC, like Bell Canada, a number of others, to get IPTV to critical mass. As IPTV gets to critical mass, you will find that those partners are anxious to have as many people monetizing their investment as possible , and the Xbox community will be one of them.

They're looking at Xbox as a distribution channel?

I think so, we're certainly talking to them about all of these things. Until there is some real business deal to announce I won't announce it, but we're set up technoliogcally, but it does require some sort kind of business relationship.

Thanks very much for taking the time to meet with us, we really appreciate it.

Thanks, I appreciate that you guys were able to take the time today.

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