Microsoft Poised to Rule Entertainment, Devices World

By eweek  |  Posted 2007-05-03

Microsoft Poised to Rule Entertainment, Devices World

LAS VEGAS—As president of Microsofts Entertainment & Devices Division, Robbie Bach drives the companys Connected Entertainment vision, offering consumers new and compelling, branded entertainment experiences across music, gaming, video and mobile communications. Bach spoke with eWEEK Senior Editor Darryl K. Taft at the companys Mix show here.

I cover developers, so the first thing I wanted to talk about was XNA, and what kind of success you have seen with that, with XNA and XNA Studio Express.

Weve kind of seen two things. One—Im going to get the precise number wrong—but hundreds of thousands of people have downloaded the kit. So, weve seen a lot of uptake on the development tools themselves.

The other place where were seeing a ton of momentum is with universities, where they are using it in their curriculum to help teach people the fundamentals of game design, and probably in some cases also teaching the fundamentals of great design, period, and how you think from a programming perspective.

And to us ultimately what thats leading to is a lot of what Ill call simple, user-generated games. And the next phase for us is understanding how to take that to the next level: How do we expose that to the audience? How do we expose that to other gamers? How do we help people create an ecosystem around those cool games?

Certainly the prototyping tool is quite interesting, but there are a lot of these games that arent prototypes—I mean theyre games, and theyre fun to play.

So, were making progress on that front. I think theres very good engagement. I think were seeing a lot of success there.

Any strategy going forward around that or any plans?

Well, theres kind of two interesting things to think about. One is how does it integrate, affect, or interact with our Arcade service on Xbox Live. Its an interesting question. Arcade is basically simple, straightforward games, graphical excellence—theyre nice-looking, but … you only want the dress-up Pac-Man so much. So, theyre nice game experiences, but how does it integrate there?

And then the second thing we have to do is we have to figure out how it works in the Xbox ecosystem. And what I mean by that is on Xbox every game is certified. We look to make sure games follow the conventions on the product, to make sure theyre technically safe, that theyre secure, so we go through a certification process.

Well, in the world in which youre using user-generated content, how do you do that? Whats the model for that? And the other part of that is how do we deal with the question of people using intellectual property from other people? I mean, these are all things that we face in the video world, and we have to figure out how to do that in the context of Xbox.

Click here to read more about XNA Game Studio Express.

And ours is a little bit more complicated because video doesnt need to be certified, and youre on the PC, so its in an open environment. In the Xbox case were in a managed environment where we do do certification, so youve got to kind of think through that.

You know, in the ideal world somebody would create an XNA game and ultimately became a sales leader on the Xbox Live Arcade. Thats our kind of nirvana.

When do you think Xbox will be able to contribute a billion dollars to Microsofts bottom line, and how?

Yeah, thats a good question. So, theres a couple different ways to think about the question. One, we tend to think of the Xbox P&L as a life-cycle P&L. Its the only way to actually think about it. Because I could make a billion dollars in one year, and you can legitimately say, well, you didnt contribute a billion dollars to the company because you lost 200 million in the first year.

So, we think of our P&L as a life-cycle P&L. And in the early phases you lose some money, you try to keep that as low as you can, and then in the later phases you try to harvest as much as you can.

Next Page: Making money on the Xbox.


There are three ways to make money on an Xbox. Generally its not on the hardware itself; well probably be gross margin neutral on that over the life cycle of the product and try to break even on that.

The second thing you try to do is you make money on the games themselves, and there are two models there. One is first-party games that Microsoft produces. The other is games that Electronic Arts or an Activision produces, and we get paid a royalty on those games.

The third place you make money is on Live, and where we actually have a very nice service thats scaling very well, and that is a business model thats subscription, ad-based, and download-based. It kind of has the full gamut of business models associated with it, and I think youre going to continue to see that grow.

And then the final place you make money is on peripherals, so game controllers, cameras, steering wheels, a whole other set of things.

Right now were doing a pretty good job. Were humming pretty well in the business. Our costs are a little higher than wed like, [but] were pushing those down; there are good initiatives underway to drive that. Game attach rate [is at the] highest level in history for a game console at this stage in the life cycle. The same with our peripheral attach rate. Xbox Live has over 6 million members.

The pieces are in place to drive the proverbial billion dollars. Specific date—oh, thats going to depend on what happens in pricing, which partly we control, partly we dont. You know what happens in component costs—mostly we have pretty good influence over that, but there are places where we dont. Pricing on memory goes up and down seemingly like a yo-yo, so [we have to manage] through that.

So, its a business that will be profitable next year—well make money next year and that will be the first time, which is pretty exciting. And then the next two or three years are the place where you need to make tracks, and the next two or three years are where you have to make money.

What about the Zune? Whats the opportunity there been like?

Well, … people always want to say, gosh, Apple has such a big lead, what are you going to do, how do you possibly compete with that, and why would you bother? And part of my response is, you know, theyve sold 100 million devices. So, lets just do some math. You and I can do this. How many people are there in the world? Five, six billion. Lets call it five—its a round number. Of those 5 billion, every single one of them has a music experience. Music is the most ubiquitous entertainment experience in the world. So, theres a music experience for all those people.

Lets say half of them are never going to have a digital music experience and never have a chance to have a digital music experience, so lop off 2.5 billion people.

Now lets just for yuks, because 2.5 billion is too big a number to deal with, lop off another billion people. Now you have a target audience of a 1.5 billion people. Not everyone is going to want a digital device; we can go through the yak-yak around that. But the audience is huge, and we are really early in whats going to happen in the music space. And the music industry is … in the process of reinventing itself.

And so for us, A) theres a big market; B) we think the opportunity is just beginning; and C) if you want to be in what we call connected entertainment, you have to be able to connect movies and video with music, with games, with communications technology to be able to do that. You cant not have a player.

To read a review of the Zune, click here.

So, early phases of this, were about 10 percent market share in the category were in, which is the hard disk. Thats a good first step. Like Xbox was before it, the first step is what it is, its nice, its not perfect. People have commentary and questions and things we can improve, and we would say, yep, youre right. And were not stupid, we see all those things, and were good developers, and we know what we need to do. And youre going to see the product get better and better and better. Youre going to see us be relentless in marketing. And youre going to see us expand into other parts of the category beyond the hard disk space. And I think we can be successful; I think we can build a nice business.

Click here to read Part 2 of the interview, including Bachs comments about the community that has developed around the Zune.

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