Joystiq

At least according to Amazon. So where does the 360 stand?

I feel very good. If you believe that this industry is about games. Games industry about games --

As opposed to lets say, accessories perhaps.

Yes [laughs], peripherals. The point I was trying to make at the press conference is that the industry is evolving very quickly and the industry is evolving. Yes, hardware is still in the fore, sales of hardware are a key indicator, but its more complex then that. There are revenue streams, there are indicators of health that are coming from different places. The connected state of our consumer allows us and our partners and everybody to do new and unique and interesting things that both bring great value to the consumer in the form of delivering demos in real-time and bringing E3 home. A great example this week, everything that we are doing is posted.

If you're not one of the fortunate 3,000 now invited to E3, we started this trend -- and I noticed that competitors are doing the same thing now -- we'll are bring it home and propping the content and you can download it as it comes available. I feel really good about the health, the slides we put up, I don't try to change the numbers. The numbers are what they are and we feel that we have a pretty good race with the Wii and we're outselling the PlayStation 3 by about 2 to 1.

The health of the industry which is the bigger question, I think is strong. We've got three consoles which are all in market and performing. I've been in this industry long enough to know that that normally would not have been the case, and I think that we've all laid down our markets and thought about who we are and what we stand for, pricing, game content of what we think of the future and connected entertainment. I feel that we are in a great position. I feel very bullish not only for us, but for the industry as a whole.

So now that you have had a chance to play with the Wii and play with the PS3, what are your thoughts on those consoles? Not necessarily how they relate to the 360. But specifically on those two systems.

Well the Wii, the innovation that the Wiimote, and pulling in people outside of typically the core gamer group that either are lapsed gamers, casual gamers, or never played a game before -- I think is great for the industry. I love playing the Wii. It's got some very unique experiences, I caught glimpses of the press conference yesterday, going to fitness, health, and well-being is an obvious move and something that I'll watch with interest. The question that Nintendo has to answer and Reggie kind of tried to do that, but is the experience sustainable? Are third parties going to be successful? First party is very strong on Nintendo platform, as it always has been, so is there room for the third parties to be very successful? Reggie certainly said that that is the case. I think they seemed to go out of their way to showcase third parties where typically its a first party love fest at times.

So I've played the Wii, enjoy the Wii. My kids are in love with it, I have adult kids so I don't have the advantage of a lot of people that I work with, who have 9 and 10 and 12 year olds, I don't have that, but they all enjoy it, clearly it aims to that demographic. With regards to the PS3, I haven't played it a lot. I only got see the back end of the conference, I had to step away from my computer to get back to work when Kojima-san was on showing the Metal Gear Solid trailer; I didn't seen LittleBigPlanet, and, of course, KillZone. So but the experience, they need some big games. You guys write about it everyday, the consumer writes about it. They need something that consumers say, this is why I need to buy a PlayStation 3. Killzone may be that, I don't know what else could be. Metal Gear Soli -- 2008. We're going to have to wait and see, but they have laid out who they are, we've certainly, as I said Tuesday night, put our cards on the table and the consumer will decide. It will be a very, very important holiday.

So getting back to what you said before, that the industry is getting strong, its supporting three consoles -- which as you know through experience with Sega hasn't always been the case. Microsoft just announced their last quarterly earnings at the end of the fiscal year, that you guys didn't make the 12 million unit goal -- the 12 million goal that was recently lowered from a previous goal. You hit 11.6. Why do you think that was?

Well you know, forecasting is an inaccurate science. We believe that 12 million looked like where we would be. We had some games move that we felt would generate some industry excitement towards the end of the fiscal year. It didn't. You could also argue that the ability for us to continue to talk about holiday meant maybe stalls for some people. We're in a generation that could be 150-175 million units of hardware. I really believe we can move that many units of hardware in this generation. When I look at the strength that exists currently in the form of the PS2, that gives me great confidence that we've got a long tail ahead of us in this generation. So missing a target -- an internal target -- by a couple of thousands is not giving me any cause for concern. We still sold 11.6 million units of hardware. Our attach rate through the roof. The lineup we've got of games this holiday--

What is the attachment rate?

5.9. Yeah. And continues to grow obviously and that is unprecedented for a console at this point in its life-cycle. The point I was trying to make, is that we as an industry need to start looking more closely at attach rates and start looking at the way that the mobile phone companies, they call it ARPU - average revenue per user. Were looking now and are looking in the future at skyrocketing development costs, go-to-market market costs (what we call GTMs), bringing games to market in the tens of millions of dollars. Pure marketing costs in terms of television campaigns in terms of millions of dollars, and we've got to continue to invest in the industry, invest in the people making games, and the only way to do that is to continue to find new revenue streams.

It may be not necessarily that taking revenue from our consumers, but bringing in consumer companies that want a piece of our very desirable demographic. Dynamic advertising platforms, sponsored downloads, of course providing downloadable content either free, advertising supported, or for payment are other models we'll look at. So its an interesting time in the industry. We think that the growth of digital distribution is something that we pioneered with Xbox Live Arcade, its something that has great potential, of course balancing it with our retail partners as well. So there is a bunch of stuff going on that I've never seen in this industry and I think we're at just the tip of the iceberg of the opportunity.

So on the topic of alternate means of distribution and alternate modes of revenue for the Xbox platform, why is there no mention of HD DVD, or how HD DVD is doing in the market, or the new Xbox IPTV function that hasn't really come out yet. None of that came out in the presentation. I think we were all expecting to hear a little bit of that.

There is nothing new -- HD DVD players sell very well. Nothing new to report. Me standing there again saying it's selling, you know, its one of those things that's part of the fabric of who we are. Its not fundamental to our strategy as regards in different to Blu-ray being fundamental to Sony's strategy for Sony Corporation, not necessarily Sony Computer Entertainment. And I don't see our games machine as being a blunt object to win a high definition movie war. We are a huge supporter of HD DVD. HD DVD continues to be something that we believe in greatly. The HD DVD market is despite of what you hear, and the PR machines of both camps are churning endlessly, is doing very well. Stand alone players are selling very well. Toshiba in particular doing well when bringing the price down to $299.

The bottom line is that I had 75 minutes to deliver the messages and I wanted to talk about games. E3 is about games. Hollywood is up the street, we wanted to talk about Disney and give that because we thought that that was a big deal. There was nothing noteworthy in HD DVD. We talk about it everyday outside of E3, but this is a games convention. We are very, very, very focused on delivering games and not confusing issues around high definition movies. We are very focused on HD DVD. If the consumer, and you've heard this from me ad nauseum. If you're fortunate enough to own one of these [points at HDTV] and you want to watch HD DVD for $199 which I do, and I love my HD DVD player, plug it in and off you go.

The E3 press was ostensibly not started by Microsoft's press conference. Sony announced their price drop on Monday, or kind of over the weekend.

Kind of a price drop! I dunno it still costs $499 and $599.

Well it was certainly a $100 cheaper so regardless of whether or not its overpriced to begin with...

But I want to make a point, its not $100 dollars cheaper. So, they are confusing the consumer. When you say price drop for a consumer, its a $100 cheaper to get into that. So yes, what was $599 is now $499. But the price of entry is the important thing in our industry. It will cost you 500 bucks to buy your entry level PlayStation 3. And what's not getting in the way of Sony doing their business is a lack of storage in their hard drive. Whats stopping Sony from growing their business, and I'm really hopefully that their business does continue grow -- and I've seen reports this morning that Capcom expects yet another price drop for the PS3 -- is the price of entry, and thats something that as business people are very cognizant of. I don't want to be anal, but thats just my perspective.

With that said, I think there was no way that but to expect that that price drop would encourage some growth of the PlayStation 3 platform. Considering that you guys just missed your internal numbers, the Xbox 360 has gone a staggering 600 days without a price drop--

I haven't counted them, but that's pretty cool.

--compared to PlayStation, PlayStation 2, Dreamcast -- Xbox which went 180 days or so before its price drop and now the PlayStation 3. The PlayStation 2 went went 525 before a price drop, and its an enormously sucessful console and you're even pushing that number. Why 600+ days before a price drop? You could have hit those numbers with a price drop. Shane Kim said that a price drop is in the works.

I don't know what Shane said. Clearly people I think are misinterpreting what Shane said, but let me be very clear that 600 days should be good news for people, good news for the industry. One of the things were looking at the need for all of us to look into consumer segments. Yes, of course ultimately there will be a price drop -- we're not going to be more than 600 days or 1200 days at our current pricing. This business is built on getting your pricing in line. This is my point back to Sony. Getting your pricing in line to attract new consumers so that you continue to replenish your consumer base. There are people who sit on the sidelines until one $199 is the pricepoint. We've seen that in previous consoles. Sony has said themselves that 80% of their volume comes at $199 or lower, and so, huge news for our industry that we're still all pretty solid and our software prices are holding well, and what that means is that we can continue to invest into new games. We're very comfortable with our pricing right now. We have nothing to announce for pricing, but you guys will be the first to know when we do.

I think that to say that not announcing price drop is good news -- maybe for you guys. But for the average consumer it's not good news. I think a lot of people really want to have a price drop when all they are seeing from a Xbox in terms of a consoles is the addition of HDMI, or this and that peripheral, or this new Halo 3 Special Edition. What people really want is to get another console or to get their first console for less money. So I guess our point with this is, are we going to see a price drop this year?

You could ask me that question all day long and you know what the answer's going to be!

I'm still obligated to ask. [laughter]

I have nothing to announce about pricing. But when we feel is the appropriate time we will do our price drop, of course.

How about an ancillary question then.

Sure try a different way. [laughter]

Lets go around the corner. [laughter]

I know how all this works. [laughter]

So you're talking about Sony getting its pricing in order. They've introduced this 80GB console and there is going to be...

I'll throw it back, why didn't they drop it to $399? You don't think that the consumer isn't screaming out for a $399 PlayStation 3?

Yes... but the PlayStation 3 also comes with a lot of very costly features out of the box that the 360 doesn't. Namely Blu-ray and a larger drive.

Believe me it's going to be about price. It will be about price. Its like when I buy a car they advertise it and they show it starting at $20,000. Price as shown -- $33,000 because its got GPS, its got Bluetooth, all this stuff. This is about price. We're a mass market industry that needs to bring in hundreds of millions of people.

So you already have three console SKUs for the 360. A lot of people still think that there is a generally mixed or muddled message for the Elite.

The only muddled message is where do you find one right now, because they are sold out.

Yeah. So for starters, can you comment on Elite sales?

Well yeah, they are very good. I typically don't do anecdotal, I wait for NPD to speak for us.

But you're confident that those numbers are going to be impressive?

Oh yeah! Its done very well. Lets be clear, what we are doing -- you're right, because the industry has never done this before, multiple SKUs. Do you remember the abuse -- they're going to do two different SKUs? The abuse we got when we announced the Core and the 360. Well, we just don't do that in the video game industry. But then we started to see, as you layer in software and services and then we started to see abuse was how can you offer me this and only offer me a 20GB hard drive? And we said you're right, hence the Elite. Is it going to be hundreds of millions of units? No. Is it a particular consumer that were aimed at? You bet.

So, you guys have just announced an additional SKU? The Halo themed Xbox.

Special Edition.

Special Edition.

Yeah.

But this unit has an HDMI port, like the Elite, and a 20GB drive like the premium.

Ok. Well I don't know if we've announced that. II'm not sure if--

That was in the USA Today article and also--

Ok, fine. [laughter]

We've got that on lockdown.

If Mike Snyder said it it must be true...

And so did Bungie. So could you comment on how you might price a product like that? Is it going to be a Premium price? (But its got HDMI.) Is it going to be Elite price? (But its got 20GB.)

The way we work with something like that, is that retail is well aware of the product, we're building out our pre-sale programs, and then there will be an announcement. It won't be months, it will be clearly weeks. What we need to do is, we owe it to retailers to not announce their price for them, clearly there will be a suggested retail, as there always is. It's a special edition. When I was at Sega we'd have have 8 SKUs going here at the same time. The Sea Man edition, the Hello Kitty edition, the Sega Sports edition. I mean this is nothing new in our industry. Its a limited edition, we run it once on the lines.

But it's a little different when it has different features. It all of a sudden has HDMI whereas the regular premium doesn't.

I don't think there is an issue there.

Lets move on to one of the big things you discussed previously. It seems to me like one of the angles of Microsoft's press conference was your exclusives.

Yeah. I still believe that content you can only buy a particular piece of hardware that makes the world go around. That has always been the core premise of this industry, providing consumers with content you only get -- you need them to choose you. And why should I choose you versus choosing the other guy?

Nintendo obviously has their first party exclusives. Traditionally they don't have very strong third party exclusives, at least not in the last generation and it looks like, if you watched their press conference yesterday, that they are continuing that trend. Sony obviously announced a couple of timed exclusives, and they seem pretty emphatic about Metal Gear Solid 4 being a Sony PlayStation 3 exclusive despite non-stop rumors to the contrary.

Despite statements from Konami.

Right. But their exclusives stem from first party as well. How do you think that strategy would play off. Nintendo has always done very well with first party exclusives. Sony has many first party studios, at least appears to have some immensely popular third party exclusives locked down like Final Fantasy and Metal Gear Solid 4. Are you guys still going after those third party exclusives?

We've talked about three in particular. You know obviously Bioshock, which I'm very excited about. Having seen it just here, almost in the final build now -- I'm not sure if you guys have had a chance to see it. Naruto is something that we need to make a bigger deal of, because the game is great and its aimed at a very different target. And of course Splinter Cell and the entire Tom Clancy series has always been great to us and we've certainly returned the favor in making Xbox a very warm and comfortable home for the Tom Clancy series. I think if you look at it, we also have a very powerful first party lineup. We've got a great deal of belief in our own ability to drive our own platform, but I think we've done more than our competitors for reaching out to the third party developers in reaching out to the community in the past 4 or 5 years.

We did a lot of work in Japan with the publishing community, the fruits of that have are again rising with Dead Rising and Lost Planet, and I think that this industry is going to ultimately come down to exclusive content. We neutralized some of the problems we've had in the previous generations with content that wasn't available on our platform. That was one of our strategies a number of years ago to make sure that didn't happen this time around. I think the team that did the third party have done a great job. But yeah, its going to be an interesting conversation with publishers about, can you provide feature exclusives that take advantage of our platform in ways that maybe they can't do on other platforms.

Probably the best example would be the exclusive content that will be available on the 360 from Grand Theft Auto 4 in spring. So, I'm very happy with where we built Microsoft Games studios over the last three years. The intellectual property that we've launched or own and how we can bring that to market over the next 5 to 10 years. Building your own IP, owning your own studios, having control of your content is very important.

I think that the story there, especially the third party software speaks really well to Microsoft as a software and a platform company in general. It makes lots of sense for Microsoft going after the third party because thats how its been successful historically, by being a platform company. But on the hardware end, we're announcing a lot of issues going on with warranty and failure rates of the Xbox 360. On the hardware end how did Microsoft back itself into this corner with quality control, where all of a sudden we've got these insanely high failure rates of 360s that have prompted this billion dollar warranty extension program?

How did we back ourselves into this corner? Well, its as simple as this. There's the complex piece of hardware that we had, and we said this ad nauseum last week, that the failure rate became unacceptable in the last few months in particular. A lot of this came out of real time, real world testing that only became real issues to us once we had millions of units in the field, globally in the conditions that we could not test for in the factory. And, I want to again apologize to anyone who's had that issue -- we're going to take care of you. I don't think we've backed ourselves into anything. But we have not done our job right in taking of taking care of the consumer and thats the important job we need to do.

I think that there is a lot of confusion with the consumer in exactly how this issue has been remedied. Not just with the extension of the warranty but with the hardware. Exactly what has had to go on to fix the problems that people have been having?

I'm not sure that the consumer needs to understand the complex technical fixes that we need to do for the multiple different problems that come together to create the three flashing red lights. I think the ability for us, all the consumer cares about is my console going to be ok? And if it isn'tm are they going to fix it and take care of it immediately? And if I [already] paid them to fix it, will I get my money back? And the answer is yes to those questions.

Well I think our audience ...

But I think you're trying to use "the consumer" to get deeper answers for your audience. Let me be very clear. We've stuck our hand up and said, we've not done our job right here, we're taking a billion dollar reserve to go fix these problems that we've created for our consumers. That is not an easy decision to make. We've done this on a global basis, we've built up our R&R [repair and replacement] centers. We've made sure our call centers are ready to go. We've stuck our hand up and said, we've screwed up, we didn't do a good job, we're sorry, we're going to take care of it. On top of that there is not going to be much conversation.

So you're not going to discuss specifically what has been fixed ... what was the matter with these consoles?

That is correct.

But are you guaranteeing or insuring that the systems that are rolling off the assembly lines now and the systems that will be returned to consumers will be fixed properly this time. It won't be a situation where there are multiple replacements.

Yeah. I mean, nothing is perfect, guys. And the other two hardware companies have their problems as well. I can't guarantee everyone in the world that we go fix one thing and then something else [won't] happen. No I'd be stupid to make that guarantee. But I feel very, very good about the quality of hardware now. You guys know this, every day in the factories where we are building these and where we are learning more about it. Sony's very good at it, Nintendo is very good at it, and we're very good at it. You're constantly tweaking, moving parts around, you're renegotiating with suppliers because your goal is to continuously raise the quality of the box, and bring the price down. Because you have to get your costs down to be able to move your pricing to the level you want. If your costs never came down, then price would never change.

So current units that are shipping now, what happens to them to address that problem?

Well we're certainly not shipping units that have problems. Knowingly I should say.

So at what point did you address the manufacturing problem? If I bought a unit 4 months ago...

There is no answer to that.

But if you can say now that you've addressed the problem, there must have been some point in the recent past where you felt like...

There is a thousand things going on at any one time. Whatever issues we had, you're constantly solving them. And by the way, there are the other guys. There are that go on, so understand that what your engineers do, of what we have hundreds if not thousands, is that you're working with your CPU, GPU, your transistor guys, your hard drive guys, your suppliers, your technicians. They are bringing down the cost, they are looking at ways to build the platform differently to build the platform more effectively and more cost effectively. So no, on May the 22nd was it like one that came out and we said thats the one that is perfect.

But you feel very confident in your units.

I do.

That they shouldn't have more than a normal failure rate at this point.

Whatever that may be.

Well, it's usually like two or three percent...

PR rep: We're out of time.

Actually I've got one more that's really pressing. What are people supposed to think of Robbie Bach having sold 6.2 million in Microsoft shares in the two months preceding the warranty extension announcement?

I'm not going to comment on that. That's Robbie and that's corporate PR. He has been a Microsoft employee for close to 18 years, he owns a tremendous amount of stock, as Microsoft employees do -- or any employee of any big publicly traded company does -- and he does what he needs to do to diversify his portfolio. And I think that's the comment the company makes. Other then that, you can ask me the question, if I had would have done that, but I can't talk for Robbie. He must have a statement on that.

Thanks for your time!

Always a pleasure.