It's been a turbulent three months for the Xbox business. The unveiling of a new games console was fumbled badly with unpopular announcements and assumptions about consumer behaviour - a situation that benefited rival Sony as much as it harmed Microsoft. Since then, the company has u-turned on its original digital vision, shelving always-on requirements, cutting back Kinect functionality and opening up to used games. And it was slow to talk about its support for independent publishing on Xbox One, only revealing detailed plans last month at Gamescom while rival Sony had spent months publicly shaking hands and kissing the babies of indie game development.
But those reveals already seem a long way off when the launch of two new home systems is only two months away. Microsoft now appears to have a more coherent message about the Xbox One and has gradually answered the awkward questions, and as the campaign to put the system at the forefront of consumer and developer minds hots up, the business is developing a stronger public presence.
GamesIndustry International sat down at Microsoft's London office last week with Phil Harrison, corporate vice president of the interactive entertainment business in Europe, for a wide-reaching interview to discuss the build up to the impending launch of Xbox One, the current state and cost of games development, Microsoft's vision of digital pricing and delivery, and the changes in publisher, developer and consumer relationships.
Q: We should catch up on the independent publishing plans. It's been four weeks since you first publicly revealed the indie publishing initiatives for Xbox One - what's been happening since then?
Phil Harrison: We've had an avalanche of interest from all corners of the globe. It's what we expected but it's great to see. Now we're working through applications and creating that dialogue with developers. As we said at the time, we have phase one where we give away development kits and loan them to the teams that inevitably will have to pass some kind of a qualification to justify a limited number of dev kits being given to them. That process is ongoing. Eventually our goal is that every retail Xbox One console becomes a dev kit. And then we open up to the widest possible audience.
"We haven't diluted our long term vision, which is all of the benefits of a connected ecosystem and what that means for all of the stakeholders - us, developer, publisher and player"
Q: How many applications have you had for the programme?
Phil Harrison: Within hours it was hundreds. I actually don't know the number now but I'm assuming it's in the thousands.
Q: How do you streamline that process. That's a lot of applications to go through and developers needs to know if they're in the queue, if they're rejected, whether they should come back in 6-12 months time...
Phil Harrison: The team with Chris Charla are the guys who have that enviable task of managing that process. That's the exact process Chris is going through now.
Q: You've announced your indie programme but to show it really works we're going to need to see the games, the way they are integrated into the Xbox One retail environment, how they are promoted and supported through digital channels. When are we going to see the first releases?
Phil Harrison: There's been a lot of debate about what is an independent developer? Is it Capy with two people, or is it Crytek with 200 people? I think it's both and it's everybody in between. There's been too much focus on the financial structure as to whether they qualify for being an indie. For me, it means they are independent of their own design decisions, they're independent in thought, they're independent in motivation and creative direction. The current structure of retailer and publisher and financial investor in a studio inevitably means there are a load of executive producers. Executive producers are a good thing, they add value, but they can also mean that certain kinds of games get built over and over again because they are more predictable in nature. They're more easy to forecast, easier to sell to a retailer and easier to pigeon hole.
"Executive producers are a good, thing they add value, but they can also mean that certain kinds of games get built over and over again"
Q: Bringing it back to the original question - when are we going to see the indie products released on Xbox One?
Phil Harrison: I don't think we're going to see things at launch. I don't think it's realistic to see a developer get the programme and build a game and get it into the market on November 22. It's reasonable to expect in early 2014 we'll start seeing the first games come through.
Q: From an infrastructure point of view I guess it's to be expected. A lot goes into launching a new console globally.
Phil Harrison: Under the radar, invisible to the consumer and hopefully invisible to the developer, there are a lot of tools on our side to ingest the content and stand the content up on our stores around the world. That requires a lot of investment in tools and technology. It's plumbing but it's important plumbing.
Q: When you first announced the Xbox One there was a lot of focus on the digital future, digital delivery, digital retail, sharing of content and online connectivity. And you took a lot of flak for that. Not all of that was justified. There's an acceptance that if you play MMOs you're connected to the internet, if you use Steam for your games there's a lot of connectivity issues there, DRM is accepted in some services more than others. When Microsoft announced similar elements for the Xbox One there was an instant revulsion that this was going to happen in console gaming. What was your reaction to that, considering a number of policies have been scaled back or changed entirely?
"I don't think it's realistic to see a developer get the indie programme and build a game and get it into the market on November 22"
Phil Harrison: Our long term vision hasn't changed at all. We haven't diluted our long term vision, which is all of the benefits of a connected ecosystem and what that means for all of the stakeholders - us, developer, publisher and crucially, the player. None of that has changed. What we recognised was when you put a disc slot in the front of a machine certain expectations come with that disc slot. We had to adapt some of our policies and it was best that we did those before we launched, which we've done. All of that can be handled in the vacuum of the pre-launch activity. And it allows the players to have a choice. They can consume the content through the medium they like the best and fits with their particular situation. I don't think there's a negative to that.
Q: Do you think you underestimated the reaction from the consumer? And I don't just mean Microsoft and the Xbox One, but the games business as a whole. Is the consumer reluctant to fully embrace the digital future? Because this is the way entertainment consumption is heading, regardless.
Phil Harrison: I don't think it was underestimated. The moment you put a disc slot in there are certain expectations and functionality that I'm used to as a consumer. I don't think it actually net-net changes anything.
This will sound like a random anecdote but I was sat buying a pair of shoes in the Nike store and while I was waiting there were two guys who worked there talking about their Xbox One preorders. It was amazing to me just how clear they were about their reasons for purchase, their motivations for purchase and what games they wanted to play. There was no discussion about DRM, there was no discussion about digital this or digital that. The passion was about the games, their friends on Xbox Live. The passion was about what the game is going to do for them and their enjoyment of the entertainment. That's what we've got to remain focused on.
Q: I'm sure once the launch is out of the way the pre-launch issues will be forgotten as the focus shifts to the games, the services and the experience.
"When you put a disc slot on a machine certain expectations come with that. We had to adapt some of our policies and it was best that we did those before we launched"
Phil Harrison: And that's where we feel very happy about the launch line-up we have and the launch window of games we'll be bringing to market. And the reaction from the specialist media and the people who have strong opinions of these things from both E3 and Gamescom. That lineup is very, very strong. And Titanfall is turning into the huge megahit that we expected it to be.
Q: Do you think games consoles can still innovate in the digital space? A lot of digital innovation over the past couple of years has come from mobile, tablets, app stores and digital services that have introduced new business models. Or will consoles always be playing catch up as they have been in the last half of this generation?
Phil Harrison: The Xbox Live Marketplace and the PSN marketplace were stood up before the App Store and iOS. The biggest screen in the house, having the most powerful CPU and GPU attached to it, is still going to be the best place for a lot of game types. Not all, we're seeing games across multiple screens which is great for the industry, but if you want the most sophisticated combination of CPU, GPU, input mechanism, biggest screen and best sound, it's going to be on console.
Ten years of Xbox Live has given us a pretty good understanding of what consumers like, what is important to them and where we can continue to innovate. Look at some of the things we're doing on Xbox One with the marketplace re-imagined, and with trending and recommendations built into the store. We're really pushing hard on this, we're not standing still by any means. Also the virality we're building into the platform that you won't see on competing stores.
If you look at our Upload service you'll see it's more than viral marketing. We're trying to complete the circle where people see friends rating games, they see an upload of the game and there's a button that says "buy me now". This is strongly related to the ID@Xbox programme too, where these viral tools will help independent developers connected with their audiences. Upload is a feature that accrues benefits to any developer or publisher, irrespective of type or size. It's going to be a big, big win for games discoverability.
"The biggest screen in the house, having the most powerful CPU and GPU attached to it, is still going to be the best place for a lot of game types"
One of the number one questions that any independent developer has to ask themselves, irrespective of platform, is what is our acquisition strategy? How do we connect our smart game idea with the audience? It's no longer about buying a couple of double page ads in the specialist press and getting a preview, review and tips over three months. It's a bit more sophisticated than that.
Q: When it comes to digital sales, one of the biggest complaints from consumers is that the price is too high. Digital products should be cheaper than boxed products - they cut out the retailer, the box-shifting, the physical manufacturing. Why aren't digital console games cheaper to buy?
Phil Harrison: You could take that point of view. But you could also take the point of view that the only way in which our industry can continue to grow is if the margin structure enriches game development. Meaning that as much as the consumer spend as possible accrues back to the creator. Striking a balance between those two extremes is going to be tricky. Particularly when you have this direct A-B comparison of Tesco selling a packaged version of the game and an online service selling the digital version of exactly the same bits and the pricing is easily comparable. What we're seeing is a trend where new business models that are going to exist only online are going to potentially be the ones that last the longest. Look at some of the free-to-play investments that we're making on Xbox 360 with World of Tanks and Warface. They won't be retailer experiences, they will be digital experiences, you won't have that direct A-B comparison.
Q: When you say as much of that consumer spend has to come back to the creators as possible, are you suggesting that games are costing more to make? Will they be more expensive to make on next-generation consoles?
"The only way in which our industry can continue to grow is if the margin structure enriches game development"
Phil Harrison: The biggest production value games continue to be very expensive to build. The data points aren't so clear but what is interesting to me is what we call Gen 8 - Xbox One - is not ten times the price of Gen 7. Even though the format is about ten times more powerful, that doesn't accrue to ten times the development costs. We saw a huge jump between Gen 5 and Gen 6, and Gen 6 and Gen 7. That was logarithmic exponential increases in cost. It seems to be tailoring out. Partly because of better middleware and tools and one artist being able to create more content from their workstation with efficiencies in the tool chain. And partly because games can now have an initial release and a series of downstream post-release expansions which are more closely linked to audience size.
So you don't have such a huge amount of investment upfront. It's not about the total investment because some games will be about hundreds and hundreds of millions of cumulative investment. The real question is what is my peak negative cash flow before I get my first dollar of revenue back? How much have I sunk in the ground before I get to my first point of revenue? The first point of revenue is going to get earlier in the cycle, and that's good.
Q: Another concern from the consumer is whether the Xbox One is an entertainment device or a games device. I know your answer is it's both, but how do you balance that marketing message, particularly at launch? You've been criticised for focusing on entertainment and sport rather than games, for example.
Phil Harrison: The short answer is we built the platform to accommodate both. The longer answer is the technology choices and the architectural choices we made in the operating system allow you to seamlessly flip between the two in a very elegant way. On Xbox 360, to load a game, unload a game, load an app, unload an app - it takes time. And is therefore very difficult to support both behaviours or both states at the same time. It was laborious. What we did on Xbox One was to build an operating system that will allow you to seamlessly switch between those two. You have both running at the same time by snapping one to the side of the screen and have these two coexist. But you can also have instant - one or two frames of time - to switch between the two. That increases the utility of the machine and increases the breadth of enjoyment that you would get from the console.
Q: How do cloud services factor into all of this and how does that change not just the games experience but the hardware itself - now you're not so focused on what's physically inside the box?
Phil Harrison: We will see the cloud come into play this year with Forza Motorsport 5 and the Drivatar features, we'll see it in dedicated servers for Call of Duty, we'll see it a little bit later in Titanfall and Kinect Sports Rivals using persistence in the cloud to really deepen the games experience. Some people will say that's just dedicated servers and there's nothing particularly unique about that. But it's the way in which we're providing the services to developers to make them really easy to access. The way in which we're creating that ubiquitous global coverage so that quality of experience for the player is very high and in a scalable way.
Our experience with the cummulative knowledge in the Azure part of the business is second to none. We're leveraging all of that power. That's one of the things that really impressed me about Microsoft was that these Azure investments have been going on for some time and they are multiple billions of dollars investment behind the cloud. This is not some future promise, it's a real business now.
"What we're seeing is a trend where new business models that are going to exist only online are going to potentially be the ones that last the longest"
Xbox One and Xbox 360 are high performance examples of our Azure business but Office 365 and other parts of the business have multiple billions of investment entrusted to our cloud. Microsoft is just going through a reorganisation to align these investments more tightly.
Q: What was your reaction to the Nokia acquisition, and how that might influence the Xbox business in the future?
Phil Harrison: Forgive me for not going into too much detail as it's not possible for me to talk about the Nokia relationship until the deal closes, which won't be for some months. To answer you question in a slightly different way we recently reorganised our studios into a new business unit inside of Microsoft Devices and Studios. It's our hardware investment in Xbox, in Surface, phone and some other hardware investment and tightly aligning them with the showcase content experiences that are built around the world by the studios. That's a very logical pairing inside one organisation with one vision.
Q: It was only 5 or 6 years ago that a lot of smaller teams and studio were being bought up and pulled in-house by publishers and bigger studios. But in a digital future where there are multiple publishing opportunities, has that changed your relationship with indies and devs? Is there such a need to acquire studios anymore?
Phil Harrison: There will always be opportunities for outright acquisition of a studio because you want to keep something unique or exclusive to your platform. Or you want to acquire the capability or the technology. I do think you're right, these indie programmes, not just ours but others in the industry, have the benefit of increasing the access points to the industry. And I'm not taking a particular platform view but an industry view. That's exciting because it gives an on-ramp to working in our space. When I started the on-ramp was the Commodore 64, you turned it on and you had a flashing cursor and off you went. That on-ramp is not so easy now because of the platform complexity. All of the various initiatives that are going on, the best thing that will ever happen to our industry is getting more talent into it.