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Focus: Microsoft's Robbie Bach at X05 (Part 2)

This is the second part of our extensive two-part interview with Robbie Bach - click here to read the first part. Where we left the interview yesterday, Bach had just highlighted Xbox Live as a key reason why next-gen consumers will want to play multi-platform games on Xbox rather than on PS3... How much does Xbox Live really help you, though? You only had ten per cent of users online in the last generation; is the Live service really as important as you're making it out to be?

Robbie Bach: Well, first of all, understand that getting to two million subscribers as fast as we did is a pretty incredible achievement - it's faster than any other service like that in terms of how it's grown to two million subscribers. That's the first thing I'd say.

The second thing I'd say is that we do think it is a big trend. Things are absolutely migrating that way - and we're also broadening what Live is. As an example, we have the Silver level service now, which is free and enables you to meet your friends, to do video chat, to download new levels, to look at trailers, to buy things in the Marketplace. That's a whole other experience that Sony just doesn't have, and that's part of the Live experience.

The third thing that's happening is broadband penetration is absolutely increasing, particularly in Europe, where Europe has trailed a little bit behind North America - we do see that changing.

I think our subscription rates are going to continue to climb, and our penetration percentage will continue to climb. We've also removed one of the big barriers to Xbox Live, which is the requirement that you have a credit card. In this generation, you won't need a credit card - you can use a debit card or whatever, and you don't need anything to sign up for Silver level service. I think there are a lot of things that are going to enable us to continue to expand, and it will be a big differentiator.

Do you expect that Sony will improve their online service offering in the next generation as well?

Maybe! I mean... In my paranoid mind, yes. But I will also say that I'm stunned that they haven't said something already. I'm assuming that they will say something at some point, but their announcement at E3 surprised me - they said nothing there - and they said nothing at Tokyo Games Show, which surprised me again. We've been waiting for them to say something.

Now, independently of that, when they do say something, we should ask some fundamental questions. First of all, the things we do on Live are just not easy. They're not going to make up three years of development work overnight, so they are going to be chasing us for a long long time to try to produce the type of functionality we have.

The second thing I'll point out, and I really don't mean this to be snotty, but I think it's just true - they've never proven to be a great software and service development organisation. You look at their online services today like Connect - frankly it's just not very good.

Well, compare and contrast it with your own music offering, MSN Music Store...

Well, fine, but compare and contrast it with Xbox Live. Compare and contrast it with some of the other work we've done online... And you know, I can tell you that even with our music store, if you compare it with the way that Sony Connect works, the music store is better. You can decide you don't like MSN Music, and I'm not going to quibble with you about whether it's the best online music service...

Right, but even in terms of basic user numbers and download volume...

I think MSN Music can outdistance Sony Connect in terms of number of users... But certainly in terms of quality of how it works, it's just better. In fact, Xbox Live uses all our MSN technology. Our billing uses MSN authentication, we use MSN Messenger...

So I'm happy, trust me. Whatever Sony announces, that's just another place where they've got to tell me where to go. Tell me where to meet, tell me what the playing field is, I'm happy to compete in the online space because I know we can do a better service than they can, and I know we have several years of head-start on them.

What about Xbox Live in Europe? What percentage of those two million users are in this territory?

The European percentage is probably slightly less than the ten per cent you see worldwide. Our penetration in Europe has been a little less than we've had in the US, in part because of the credit card issue and in part because of the broadband penetration. Those are the two major barriers here.

The other slight tricky thing that we're aggressively working on in Europe is that you have to do more community management in Europe, because of the language issues. The US has the benefit of one unified market with one language - whereas in Europe, if you're an Italian, you want to play against people who speak Italian. There's this law of numbers that says that you have to get to a critical mass of Italian speakers before you create the community that starts the cycle of getting the community bigger.

This is where the free level really comes into play, because we think we can get a critical mass and a community in some of these smaller markets, in the smaller language markets, to drive that towards success. Certainly, Live will be a big focus in Europe.

When you announced that you had a million Live subscribers, we were given to understand that only a hundred thousand of those were in Europe - has that proportion now increased?

It's not quite that... I don't even know if it was that skewed at the million mark, it may have been. It's not quite that skewed, but there's certainly a noticeable difference between North America and Europe, I won't kid you about that. That's not something we like, and that's something we're working on changing - but it is the fact today.

Let's not forget though, that if you look at console buying - we know the numbers, and the US also outdistances Europe in console buying. If we look at the territories around the world, we'd say North America is a big success. Australia is a big success, Canada is a big success. We'd say Northern Europe is a big success; we'd say Central Europe has been successful, but not as big as we'd like it to be. Spain and parts of Southern Europe have been a little bit disappointing. It does vary a lot by market.

Live feels very much like a North American proposition in terms of how it's pitched and promoted - you could almost say the same thing about the Xbox as a whole, really. Is that something that you see changing with Xbox 360?

That goes back to the question of what we want to do with this product. One of the early statements that we made in our definition document was that this is a global product. It needed to be designed globally, it needed to have global content, it needed to be marketed globally. We need to think about this as something that can work in all markets around the world.

So we literally, starting from the design of the console, the content, to the marketing work that we're doing, we said, "what do we have to do to make this product not just a North American product that we export to other markets, but to make this a European product, a North American product, a Japanese product, ultimately an Asian product, a Latin American product..." And so on.

That means shipping games at the same time. That means thinking about design, and working with design firms from around the world to make sure it's a global design. That means thinking about marketing promotions, which is why we're working with Adidas and with FIFA to deal with the market effectively - outside, you know, the NFL. I think that you're seeing that influence in everything we do.

You know, by nature the first product was a start-from-scratch; we have 20 people, we have 18 months, go! We did what we could do in that time period. This product was much more thoughtful, much more methodical; much more designed from the get-go to think about all those different requirements.

Live is a good example, where we said, "okay, we need a credit card" - we didn't think about that very well, and so we've gone back and asked ourselves what we have to do in each of those markets.

What kind of targets do you have for Xbox Live over the coming years?

The only number we've talked about publicly is the number of people we want to get on the service in some way shape or form. We said we'd like to get our penetration up to about 50 per cent - including Silver, the people who are on there for free.

Frankly, we've been so bad at forecasting our subscription rates - the good news being that we've been bad the wrong way, or the right way, consistently - we're going to wait and see how that evolves as we go into the next generation before we forecast again.

Right now, the thing we've been pretty public about is that we think we can get half of the users onto the service in one shape or form.

When do you actually expect Sony to show up in the next-generation battle, particularly in Europe?

It'll be very interesting to see. You know, historically, if we went by history I would say they'd be lucky to be in 2006. If you just do the mathematics on what they did before, getting a launch in 2006 in Europe would be a big achievement for them. Maybe they'll decide to do something different. I don't know.

Certainly, we're going to put a lot of pressure on them, because we're going to be in Europe, we're going to be in North America, we're going to be in Japan - so it's not like they're going to be able to pick where we're not and take advantage of that. They're going to have to make some choices, and I don't know what they'll do.

When you talk about putting a lot of pressure on Sony, you've obviously done that already simply by launching the next-generation race quite a while before they would have wanted to - but are you concerned that you've also put undue pressure on the third party publishers that you rely on for support, whose main business at the moment is PS2, current-generation titles?

Well, certainly I don't think that protecting the PS2 ecosystem is particularly part of my job. I do think that our job is to make sure that our publishers, as they work with us, do great business on Xbox and on Xbox 360.

Actually, in a funny way, we'll benefit from PS2 continuing to sell, because any publisher who does a PS2 game is going to do an Xbox game. Part of the reason that we have such great content on today's console is that people are already doing PS2 games, so they figure it's easy to do Xbox games, and there are twenty-plus million customers out there so they should just go ahead and do the game.

So I don't think that's really my province to try to manage that, other than making sure that my publishing partners know that I'm doing everything I can to ensure that the Xbox ecosystem continues strong so that we can make a successful migration to the future. We're absolutely committed to that.

Are you going to continue shipping Xbox hardware units through into 2006 and perhaps even beyond?

We're definitely going to ship Xbox hardware units into 2006. We've been very clear with publishers that we want them to do titles through 2006 and even into 2007. We're working with our retailers on shelf space, displays, and keeping interactives in stores. There are some space constraints but we'll manage around them - most of the retailers are actually expanding their shelf space, so I think that will be quite good. We're certainly committed to doing that.

Do you expect to drop the Xbox price point again in future?

Well, right now we're selling every console we can produce. Pricing, really, at this stage in the market isn't a competitive thing. It's a market-driven phenomenon. At $149, 149 Euro, we're selling a lot of product, and it's great value. Who knows, the market may change, but as long as we're tracking demand the way we are, we're quite happy.

How do the Xbox and the Xbox 360 compare in terms of manufacturing costs and subsidies?

They're quite different. Let's just put it that way.

Basically, Xbox was done, as I said, in 18 months. We used a lot of off-the-shelf parts, which was required to get the product to market in time and made it easy for developers, so that was good. The challenges over time have been that it's tougher to cost-reduce the product. We couldn't combine chipsets - we actually couldn't change the chipsets at all, because they weren't ours. NVIDIA and Intel were just producing the chips and then supplying them to us.

So there wasn't anything we could do to combine chips, or merge the silicon architecture - and that's where the huge amount of cost reduction actually comes from. You know, in hard discs and DVD drives, there's actually not that much cost reduction that happens. There are physical laws - a spinning platter costs so much, and there's very little you can do about that.

In this generation, we actually manage the intellectual property for our chipsets ourselves. We have the capability to combine those chips, to redesign them, to cost-reduce them - and so this will be a far more cost-effective product from a manufacturing perspective. The beginning of a cycle is always high cost, but that will go down in a more straightforward and predictable fashion on Xbox 360 than it did with Xbox.

Given that you're going to be subsidising the hardware, how does the media functionality of the console fit into your business model? You've built a system that you describe as a "digital amplifier, and that people could actually buy with no intention of buying any games for it - how does that work on a console whose business model depends on people buying game software?

What you're going to end up with is a mix of customers. This has always been the case. You end up with a mix of customers - in theory, you could have a customer who buys Xbox 360 and never buys a game. I don't think that's going to happen, but in theory, that's a possibility. Then you'll have customers who buy twenty, thirty, forty, fifty games - we see that today.

Different customers have a different profile for us in terms of profitability. The customer who buys a few games and uses the system mostly for media amplification... Well, we'll probably still end up making a profit on that purchase, but not at the same rate as the customer who buys a ton of games. So that's one way to think about it.

Another way to think about it is, this device is absolutely designed to play games. I think the number of people who are going to spend $299 or $399 on this to be able to plug their iPod into the TV is very small. Most people are going to buy it because they want a videogames console, and if they do something else with it, fine. That's an added functionality. It's the same thing as DVD playback in the last generation - with the exception of the very first buyers in Japan, where DVD drives were so expensive, people didn't buy, and today don't buy, Xbox because they want to play DVDs.

But a lot of people do buy Xbox on the basis of putting a mod chip into it and using it as a media amplifier for their music and movies.

Yeah, but they still play games, right? They've just decided that they don't want to be a part of the business model, period. They use the modification to get around the game cart as well as the media experience. At least our data would tell you that when you see some of those boxes that have been modified, they all have tons of games on them.

So again, I think, given the amount of money you have to spend or invest, that people are generally looking to buy a videogames console - and then they want to have the capability to extend their media experience. We're not particularly worried about that.

The other advantage we have with this product is that over its lifecycle, it's not a subsidised piece of hardware. We think the hardware costs will roughly allow us to break even over the lifecycle. So even in the extreme case in which a customer buys a console and never buys any software - which, again, I think is unlikely to happen - but even in that extreme case it's not such a bad thing.

Is that something that happened with Xbox? Have you ever hit a break-even point on hardware costs against sale prices?

In the hardware, I think we've said pretty consistently that the hardware has been subsidised throughout the life cycle of the product. Again, part of the design for it was that we had to make an investment to get into the marketplace; we had 18 months. We didn't design the hardware to be a break-even endeavour over the life cycle, we designed it to be the most powerful console, and to have an impact.

We think it did that successfully, and it just required us to fund that. Now with Xbox 360 we have the opportunity to make that investment pay off.

Robbie Bach is Microsoft's chief Xbox officer. Interview by Rob Fahey.

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