If you haven't already watched the video, now you can read the transcription of our interview with Shane Kim, General Manager of Microsoft Game Studios. During E3, Vlad Cole and I got some time to sit down and ask him about some of the biggest questions facing Microsoft's early entrant into the next-gen console wars, like whether there are any more developer acquisitions lined up, which Xbox Live Arcade titles will show up on Vista with Live Anywhere, what are the plans for ad-supported gaming, and just how many paid subscribers does Xbox Live has.

We're corroborating with several sources: is Peter Moore's [Grand Theft Auto 4] tattoo real?

You know, I wasn't there when it was put on there, it's a very personal thing so I can neither confirm nor deny.

Okay... so it's real. Prior to E3, people were really looking forward to actual demonstrations of the Wii controller. That was the big buzz coming into the show and, after they unveiled it, I think people were more or less satisfied with it. So how do you think you fared versus that intense excitement towards that controller?

I think we fared extremely well.  One of the big things we talked about yesterday was all the momentum we're going to have this next generation. We're going to have 10 million units in consumers' hands before the competitor even ships unit one. We're well on our way to 6 million connected members on Xbox Live and we're going to have 160 games in the market by the end of the year. We've got great momentum. We had Bill Gates attend E3 for the first time ever to announce the vision of Live anywhere. Again, demonstrating leadership in the online space isn't just about what we've achieved to date, but also about how we're going to take that forward across multiple platforms and devices. And finally, first and foremost, it's about the games and the content. Yesterday we started with Gears of War and ended with Halo 3, and we sprinkled in a little bit of Fable 2, Forza 2, Alan Wake, and, oh by the way, the Grand Theft Auto 4 announcement as well. So I think from the content standpoint we're definitely doing great there. So, better online, better content, and better pricing than some of the competition; we feel good about where we're at.
Do you think it's important to win E3?  I think most people say you have, at least in terms of the keynotes. 

I think it's always great to be recognized for what you're doing, whether it's at E3 or any other point. Sometimes I worry there's too much importance placed on that but since people are saying we won this year, I'll say it's a great thing we won E3.

On
Grand Theft Auto 4, how did you keep Sony quiet on that? Obviously it's not exclusive to the Xbox 360, why weren't they announcing it as well?

I think you've got to ask Rockstar and the Sony guys there. Obviously that was going to be a major announcement because in many respects, Grand Theft Auto 3 was the thing that propelled PlayStation 2 to so much success, and now it's going to be available on Xbox 360 from day one. What you're seeing now is the third-party playing field is really becoming more level, more even. And all the exclusive content -- the content that is really going to differentiate the platforms -- has to come from the first parties. That's where Microsoft Game Studios is really trying to step up and those titles that we showed yesterday hopefully demonstrate to everybody that we're in a greater position.

It's clear that part of this "stepping up" is acquisition. You just acquired Lionhead. Is that acquisition streak going to continue?


I actually don't think it's part of stepping up to be honest. At least not the way we think about it. We don't have an acquisition strategy that says, "Hey, you must acquire companies and that's how you get bigger and stronger as a first party." Acquisition isn't always the right thing. Owning the independent developer isn't always what they want. Every relationship with every development partner -- whether its an internal studio or an independent developer -- is very different. In this particular case Peter [Molyneaux], I think, wanted to not have to worry about the financial security and challenges of being an independent developer and welcomed becoming part of Microsoft Game Studios, and that was fantastic.

At the same time, just given the nature of the console transition, there's a lot of uncertainty: stocks are taking a hit and, as a result, analysts are worried about what's going on. They didn't expect the prior-gen sales to take a dip as quickly as they did and things are relatively cheap from an acquisition standpoint. Are you finding there are other attractive developers out there?


The most important thing for us is to establish relationships -- publishing and developing relationships -- with the very best talent possible. And if an acquisition grows out of that and it makes sense for both parties, that's fantastic. But it really isn't, "Oh gosh the market's right." It's not real estate. "Now's the time to flip the studio because the prices have risen." That's really not the way we look at it.

Do you believe that the first of "The Big Three" to 10 million units will win the race?

I think it's a very key milestone. We've said that historically if you look at the performance of prior-console generations that's been a very important milestone. I think it proves to a lot of people -- customers, third parties, the press, the retailers -- that we are in a leadership position, we have tremendous momentum. What I'm not going to say is that we've got it sewn up because of that. We're going to continue to execute once we get to 10 million, once we get to 15, 20, et cetera. We've got a great strategy, we know what we've got to do, we've just got to be in full execution mode.

About the integration between the PC and Xbox 360: is the entire Xbox 360 Live Marketplace going to be available on the Vista platform?

I think what you saw yesterday with Live Anywhere is that is our vision is to bring all of the great experiences you have today -- and, of course, things we haven't even thought of yet -- and Xbox Live and Xbox Live Marketplace, Xbox Live Arcade, et cetera, to all of that cross-platform experience. It's the difference between just providing connected gameplay and really delivering a complete unified connected service that has community, identity, economy, all that built in seamlessly, and it just works. So yeah, the vision is to eventually bring all of those innovations and those features cross platform.

Will you apply the same portfolio-management strategy that's made XBLA successful to the Vista platform?

That's right.

So to put a really fine point on it: Geometry Wars: Retro Evolved on Windows Vista is 
going to happen, it's just a question of schedule?


Picking that particular title, we're not announcing specific titles. Each title is gonna be up to the publisher, just as it is today when you're deciding which platforms to publish on. What we want to do is provide the platform, make it very easy to deliver their content on multiple platforms and devices connected into this service, It ultimately comes down to each publisher but, as a publisher, I don't know why I wouldn't want to take advantage of that.

So you're hinting at a cost that's associated with porting those titles from the Xbox 360 to the Windows Vista platform ...

But because of the work that we're going to do from a development standpoint we're gonna make that cost much lower than our competitors can, and much lower than the cost of doing it on your own in a disconnected way.

So we'll see titles like Geometry Wars: Retro Evolved, which has like a 40% conversion rate. Most likely it will make sense to pay that cost to bring it over to Windows Vista, but some of your lower converting titles, we don't know what they are specifically, but you've got some that are under 10%. Those may not make it?

Sure, those may not make it. And I think again, you're going to cull the crop and figure out which titles really do make sense on the other platforms.  And it's not going to make sense on every platform. Some content does make more sense on a specific platform.

Interoperability between Windows Vista and 360 games: will that be handled on a per title basis for handicapping, are you going to use your TrueSkill system [to handle that]?

The Shadowrun guys are working very hard to make sure that it's an even fight. So controller players -- whether they're on Windows or Xbox 360 -- have very fair competition with the mouse and keyboard players. They'll tell you -- and I don't know if they're exaggerating -- they'll tell you that many people prefer playing Shadowrun with the controller versus the mouse and keyboard. They understand that, historically, that's been a real problem and that people haven't wanted to play versus the mouse and keyboard players because they think [those players] have an advantage. So those guys are working very hard to make sure that, from a control standpoint, there is no advantage on a platform basis.

Will Halo 2 have any interoperability when it's released for Vista... ?

No, we're just bringing over the Halo 2 experience over to Vista. It will support the online services though, that we're bringing over to Windows Vista.

In terms of digital distribution initiatives, Xbox Live has proven that there is a hunger for a certain amount of digitally distributed content. By the end of this generation of the console cycle, what percent of revenue do you think will be earned from digital distribution? Fifty percent, twenty five percent?

I haven't even thought about it that way. I mean it's a great question, don't get me wrong, it's a great question, and it's going to actually be a very significant number. In terms of percentage though, you're talking about $50-$60 titles at retail being sold. I don't think that digital distribution as a percent of revenue will become 10, 20, 30 percent. It's hard to know what to think of that in terms of percentage. In absolute terms I do believe it's going to become a very significant number. Just like I think advertising and sponsorship is going to grow to be a significant part, which is a good thing from a publisher's standpoint and a developer's standpoint. We have to figure out ways to grow the business model of console gaming.

Alright, you opened up it up to questions on advertising, but before we do, do you believe by the end of this console cycle, we'll see full retail titles distributed digitally to consoles?

I think you may see that in some markets. It's certainly a function of storage; it's a function of bandwidth and the ability to get it down; there's regulatory aspects to it; there's consumer aspects to it; we have to take into account our retailer ecosystem -- it's very important, we have great partners in the retail space. So there's a lot of very tricky issues. Do I think that digital distribution is coming? I absolutely do. It's not just Xbox Live Arcade by the way, but digital distribution is coming. In markets where there is significant piracy issues, and counterfeiting, digital distribution is really important for us in order to prove that there is a viable business model there.

The problem with those markets is they tend to lack the bandwidth that makes digital distribution viable. I think Brazil is one of the new countries you're going to go into, the penetration isn't there in terms of broadband.

But some of the markets in Asia where we do also have piracy problems, there is great broadband penetration, and very high-speed broadband penetration. It's going to vary market by market. It's going to depend on what the specific market situation is. By the end of this generation do I think it's going to be possible? Yeah, I think it's going to be possible.


Onto the advertising: will there be a version of Xbox Live Gold that's ad-supported so that people who are reticent about spending money on an online subscription for their console might be able to experience that same gameplay that someone who's paying for Gold currently experiences?

As opposed to paying for a Gold membership? Boy, nothing that we're announcing today, that's for sure. Just being able to integrate more of the in-game advertising, sponsorships, enabling more subscription types of business models, that's really what we're focusing on. As opposed to whether we could possibly remove the Gold membership level.

But the Gold membership level is a barrier right now to adoption. You've got 60% of the consoles connected, and that includes Gold and Silver. Who knows what the Gold membership level is. Are you able to say?


It's great! What I'll refer back to is last year, at this time, we talked about having well over 2 million subscribers. A big chunk of the greater than 3 million we've got currently connected are Gold subscribers. People are still seeing a great deal of value in the Gold level membership.

What's a "big chunk?" Over half?

We were already over 2 million subscribers last year and we've had great conversion.

I'm sorry, if you have 60% connected out of all of the Xbox 360 ...

Just to make the numbers easy, so there's no confusion: we have over 3 million connected members today, Gold and Silver.

Approximately what proportion of those are Gold?

I'm not going to tell you exactly, but I'll just refer back. Last year at this time we talked about having 2 million paid subscribers to Xbox Live and we've had a great conversion from Xbox to Xbox 360, so draw from that what you will.

So it would indicate over half.

It would indicate over half.

When do you plan on implementing your recent Massive purchase to deliver ads to the Xbox 360?

We're gonna start working on that right away. That's a major purchase for the company and obviously we're going to add that technology to our adCenter platform. Our general online advertising platform, but it's certainly a big part of what we think the future's going to be in the interactive entertainment space. It's all about figuring out what kinds of new business models, revenue streams can be used to supplement just the straight retail sale of games. A key thing about this -- before anyone gets too freaked out about it -- is that it has to be done in such a way that it's not offensive, intrusive, doesn't take away from the gaming experience.

That being said, are there any plans to reduce the price of $60 third-party titles if they have ad-content inside?

I think that's always up to the publisher.

What about Microsoft Game Studios?

I think, again, we're going to look at all these different business models as they emerge. Whether it's using promotional partners to sponsor downloadable content -- which is also starting to happen as an example so we don't have to charge customers -- that's something that we're starting to look at more and more. Looking at how advertising might be able to supplement from a pricing standpoint, that's got to be part of the equation but I don't know if that's going to happen. Even though you said I invited the advertising question, you were going to ask it anyways (laughs).
Of course you are sensitive to gamers freaking out about this; we've written about it a lot on Joystiq and there's a lot of sensitivity to it. "I don't want to have to wait extra time for my game to load." "I don't want to have to download ads all the time." "I don't want it clogging my connection." So what are some examples, outside of what Massive has already put on their website, of allowable or okay or friendly advertising inserted into Xbox Live?

I really don't have specific examples for you today, to be honest. I just know the underlying philosophy, the principle going in, is that we can't piss off the gamer. We are very sensitive to that. By the same token, I believe it can be done in a fashion -- and we'll provide more concrete examples as we start to develop them -- that won't be offensive to gamers. People do have to realize that the content we're delivering is very high quality, world-class, ambitious, and all of that stuff, and it's expensive to produce. So from a publishing standpoint, and a development standpoint, we do have to figure out ways to improve that overall business model. But first and foremost we can't undermine the underlying entertainment experience.

That's in keeping with what you've said about your portfolio strategy, you're not just letting anything onto the console. It's a very controlled environment. At the same time the Windows platform is not quite so controlled; it's more of a Wild West environment. How are you going to mediate between those extremes?

Truthfully, on the Xbox 360 side, you guys really need to talk to George Beckham about how he thinks about which third-party titles to allow on and off. I have nothing to do with that -- I want to make that very clear -- the first-party guys don't get to say anything about third-party titles. With respect to Windows though, the market is going to regulate that, right? In terms of what succeeds and what doesn't. Today, with the cost of development, publishers and developers really can't afford to take chances on mediocre titles. So I think there's a little bit of self-regulation that's going to happen.

Whether or not we start to introduce more of a model on the Windows side where we say, "Look, there's these approved Windows titles" -- which is essentially what we do on the 360 -- I can' t say for sure today. But that would be a major change in the way Windows gaming has historically worked. As you know we don't charge a royalty to publishers to publish their games on the Windows platform. So there's a bunch of fundamental economic changes that would have to go along with that. Certainly nothing that we're talking about right now.

Thanks for your time.

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