Joystiq

What site is that? I dunno what you're talking about! Is the WiFi adapter included in the new Elite SKU?

No, the WiFi adapter has always been sold separately and that has not changed.

There have been pictures of a Canadian bundle coming out that includes Halo 3 and the WiFI adapter, so I think a lot of people were hoping some of that would trickle onto the new Elite SKU. It's got a new package and everything. Why the decision to keep the WiFi adapter out when you have a $300 PS3 that has Blu-ray and WiFi built-in out of the box?

I mean our position on that has not changed. Our philosophy this generation was to not make people pay for things that they weren't going to use. So at a base experience, that's why you get a console out of the box; you get a controller out of the box; whether or not you want storage – we know some owners want that, some don't – so that's why we offer the two SKUs, with or without storage. The ability to connect and get online is built into the console; whether or not you need WiFi is something that we do separately. So it's the way that we define the system and part of the philosophy that we've taken this generation.

In terms of hard drives, the $299 PlayStation 3 SKU also comes with a 120 gigabyte drive, the same size that's in the Xbox at that price point starting Friday. Except Sony's hard drive is less proprietary, easier to upgrade, and you'll be able to upgrade it far cheaper. With a lot of the offerings on Xbox Live now really exceeding the ability of the Arcade SKU -- look at a game like Shadow Complex, for example, which wouldn't even fit on a Memory Unit at all -- that the expensive hard drives, it seems like you're losing some feature parity there where the competition's offering the same size drive and the ability to upgrade for far cheaper. Any plans to reduce the price of hard drives or to make that upgrade process easier?

Well, I think we've done a couple of things. First, we've enabled a lot of online experiences that don't require the hard drive, so if you think about what we did with Netflix last year or what we're doing this holiday by taking our entire video library -- movies and TV shows -- and making them instantly streaming. So, you know, there's no download required, so that's something as an Arcade owner you'll now be able to experience. You know, even 1080p movies at the press of a button. Things like adding Facebook and Twitter and Last.fm, those are all really rich experiences that are not hard drive intensive or storage intensive.

So, you know, on one hand we're doing that. On the other side, we're taking our premium SKU with our largest hard drive, the 120GB hard drive, and lowering the price of that by $100, so making that much more affordable for customers that do want the storage and do want to download a lot of games. And so we kind of feel like we're trying to add more value on both ends. We obviously have taken a different approach doing that then perhaps what our competition's done, but we think it served us pretty well and, you know, if you look at the sales results I think they reflect that.

Speaking of things like Games on Demand, who decides which games wind up on the Games on Demand service? Is that strictly Microsoft? Is that the publishers coming to Microsoft? And why are some games -- specifically let's say something like Rockstar's Table Tennis -- actually more expensive on the digital download service than they are at retail?

We basically play the role of a retailer, if you think about Games on Demand. The publishers decide if they want to offer their games digitally or not. They come to us with the suggested price that they think that it should be sold at. So, in many ways, they kind of hold on their cards in this and how that shapes up from a standpoint of "Can you find a cheaper particular retailer or not?" I'm sure you can, but the convenience of being able to digitally download a game and be able to play it right off your hard drive is something that, I guess, people think that they want to pay for.

How about the prices for Avatar clothing items? Does Microsoft fill the same role as kind of retailer there?

Yes, that's kind of the role that we play across all the online stuff from Arcade games to add-on content. I will tell you, the Avatar Marketplace has been tremendously successful. The amount of downloads, and even associated revenue with that, has greatly exceeded even what we've forecasted by a significant margin. When we first launched Avatars and we first added add-on content to them, our intention was never to actually charge for the content. We just wanted to include Avatars into the online experience and be able to customize and create your own Avatar and integrate that into games and have things to be a unlockable in games and all that.

Then, as you know, we started to hear from brands and game makers that they wanted to offer premium items to add on to that, so we decided to add the Avatar Marketplace. But we really didn't know what the response would be, if people were really willing to pay for this. I could tell you a very confident "Yes!" People do want to buy and pay for the stuff, and some rather large numbers, believe it or not.

Splinter Cell was recently revealed to be delayed until 2010. With that delay, what do you think the Xbox-exclusive title to spearhead Microsoft's Xbox 360 holiday campaign is going to be?

It's funny, I was just looking at how we stacked up. I think in many ways, the holiday lineup was pretty heavy already. So I think, it helps having a couple of those titles move out to the spring. We still left – I think hands-down – not even close to the competition from an exclusive standpoint. I know Sony has Uncharted but, beyond that, I can't think of many top triple-A exclusives.

Whereas, if you compare to what we're offering, you've got Halo 3: ODST; you've got Forza 3; you've got the new GTA DLC as well as the retail standalone game; you've got Left 4 Dead 2; you just mentioned we just launched Shadow Complex; plus everything else that we bring to Arcade. I would add that if you like Netflix or Facebook or Twitter or Instant 1080p movies or Last.fm, all of those experiences are going to be exclusive on Xbox 360 this holiday as well. I think we actually shape up really really well relative to the competition.

Any plans for bundles before Christmas time? That's something that you guys have been doing for the last couple of years. I noticed on Amazon that the Elite lineup shows a Fall 2008 bundle, Spring 2009 bundle, and the Fall 2009 bundle is just this new Elite box with no games included. Any plans to make more bundles?

Right now, we're just announcing the price drop on the Elite console so, with that said, we always sort of keep our options open in regards to bundling. You know, retailers do a lot of things retail-specific. We know the craziness that comes with Black Friday. We don't have anything to announce at this time, but I'm sure there will be different offers depending on where you go and what time of the year it is.

Did Sony force Microsoft's hand in the announcements or was the SKU shuffle – getting rid of the Pro and the price cut – already planned for the holidays?

Oh, yes, I mean, we've been planning this many, many months in advance. We strategically plan our life cycle details out with a multi-year plan, but the specifics of the way we handle this transition and this price drop is something that we planned months in advance. I'd say the fact that we announced our price drop within a week of Sony's is probably just a bit of a coincidence and probably more reflective of the fact that we're heading into the holiday season than anything else. We surely didn't, in the last few days, pull this out of our hat. We've got retail ads lined up this weekend and circulars and in-store stuff that we've been planning for many months.

Yeah, we've seen a lot of those, I think.

[Laughter.] Yeah, exactly. And by the way, we do read Joystiq so we're pretty sure we knew what Sony is doing too. If we wanted to get the jump on them we could have done that, but we had a plan and we obviously wanted to stick to it.

Yeah, that was going to be my next question, so you beat me to it. That said, what do you think of the PS3 Slim?

I'm not surprised. As I said, I do read Joystiq so I always expected it. I thought it would be announced at E3. I was kind of surprised it took them this long to announce it. I know it's part of their cost-reduction efforts. I know they've done a lot of things to lower the costs of their system and pulled some things out to help them get to that lower price point.

That said, if you're a customer that's walking in the store today and you've got $200 in your pocket, we're the only console that you can afford. So I would think you would not underestimate the value of having a $199 mass-marketed SKU, given this economy, given where we are in the life cycle and the type of customer that's buying systems today.

We feel like we offer tremendous value and even if you stack them up side-by-side: more games, more exclusives, more online entertainment. We feel like hands-down we'll be very competitive this holiday.

I think a lot of people are wondering why Sony – which has a system that costs more to build, arguably has more complicated components inside and came to market a year after the Xbox 360 – why the PS3 was shrunk before the Xbox. And obviously considering some of the hardware difficulties Microsoft has had with the Xbox, we may have expected to see a major revision to that product sooner. Why do you think that is?

Well I mean I guess you could argue that they started with a much, much larger console to begin with, so maybe that was part of it. You know, I think we're really happy with the Xbox 360 today. We've obviously made a lot of improvements to internal components and chip sizes and heat output and cooling – all those types of things that enable us to have made dramatic improvements in quality improvement. It enabled us to lower component costs, which we then passed through price reduction.

We feel really good about the quality of our hardware today, how it's performing and that fact that we're able to be competitive from a price point as well.

Obviously Nexflix is a really big deal for Microsoft and there was some language released in some marketing materials from Xbox recently stating that it was an "exclusive" relationship. In interviews that we've had with not only people from Xbox but from Netflix, there seems to be a lack of clarity on what "exclusive" means and whether it's a timed exclusive or if it's exclusive because, frankly, you guys are the only ones that really have it right now. Can you offer any clarification on that?

I don't think we've publicly disclosed the details of exclusivity, but we do have an exclusive arrangement with Netflix, and so obviously there's Netflix – I can tell you this holiday you won't find on any other console. I can't speak to 10 years from now or many years from now – forever isn't a word that we use a lot in this industry. But for now we're obviously really happy about our relationship, that's why we've added a lot more functionality with the update and the ability to add to your queue. I'm a huge fan of it myself; I use it all the time. It's inspired us to do things like add the Zune HD, the instant 1080p movie viewing as well.

Netflix on the web, the experience is still a lot better than the experience you get on the Xbox. You still can't search on the Xbox, which seems like a strange shortcoming to me. The explanation we were given by somebody at Xbox was that you wanted to replicate the Video Marketplace experience, which doesn't make a lot of sense when the whole point of Netflix is to pretty much demolish that video store experience and give you something far better.

The Netflix website not only allows you to search, but see what movies you share with friends and how you line up. It seems like that social experience is something that would translate really well to the Xbox, where you already have friends who could have Netflix. Are there any plans to mesh your Xbox Live friends and that Netflix friends experience?

Great question or questions. I would say you know here's the way I think about this: There are like 10 things that we would like to do. And we have the time and resources to maybe do two or three of them, and so it's just a matter of prioritization. And so we said okay, we want to add party mode we want the ability to watch movies and share those with your friends together. We want to build it in a way that makes sense so it's not just your randomly thrown in you can actually vote for a movie, you can communicate, there's a fun way to watch together, and we wanted to make it a good experience that was optimized for the living room. We were going to add the ability to add to your queue and build a browse as well.

So there is more, absolutely would love to do more on top of that, but for now we feel like, not only are we delivering this all you can eat Netflix experience that no one else is doing, but were adding all these other additions to it, so who knows over time what we will do. But as you know every year we add more things, things get better and that's just kind of our philosophy, is that we built this system designed for continuous improvement, and we will continue to. If you own an Xbox today, a year from now, you will get a lot more functionality and features as part of that purchase.

Some of the functionality and features that I've been wondering a lot about that we've talked about in the past, other streaming video services. Services like Hulu, or Amazon Unbox or YouTube. Any plans to bring those types of services to the Xbox 360?

You have asked me Chris, I think, about Hulu maybe six times over the past couple of years.

Probably, I'm going to keep asking until you guys give me something.

You get the Hulu award for consistency. Here's what I will say about all those things and just sort of categorically. We'd like to work with a lot of partners in the streaming space. And we obviously have the scale, and the technology and the ability to bring these to market. But it does require a partnership, it requires a willingness from both sides to want to play in this space and some partners like Last.fm and Netflix and Twitter and Facebook are really excited to do this and be in the living room, and then there's obviously other partners that are a little more cautious and concerned about offering these experiences that maybe they're doing on the PC but maybe not quite ready to do that on the TV for a variety of reasons. So maybe their positions will change over time, but for now, many of those things are not enabled, not because we don't want to do them, but because our partners are not interested.

I can certainly see that being the Hulu answer after the whole Boxee debacle. But how about a service like Amazon Unbox? It's built into my television, so it's already in the living room. It seems like it would be a great match for the Xbox. Or YouTube, which is built into pretty much everything from my phone to my socks.

Yeah, there's a lot. Some of those, they are all, each of them has their own little stories; they're all complicated in their own way. It's like asking out a really hot chick on a date, they don't all say yes. Some of them have said yes, some of them we'll just keep asking, and then maybe then they will go out with us.

You say us; we both know from experience of course, since we're nerds.

But we get credit for trying, right?

That's right. "A" for effort. So the only thing I've asked you about more than Hulu I think, and this is something I have been asking people at Xbox since 2005, and I'm going to keep asking until it comes out. Clan support?

Yeah. Clans. Groups.

Groups perhaps, it still seems like the number one missing component in the Xbox Live experience and it's something I feel, with Facebook coming, it gives you a perfect "in" into an existing "Groups" functionality. Do you have any immediate plans to implement group support?

We don't have any immediate plans, so it's obviously not coming this holiday. It falls back into that same category, you know it's something that we absolutely have thought of and it's something that in many ways there is a lot of component reasons why it would make sense to do stuff like that. You know, give us time. We want to do things that are right. There are a lot of inter-dependencies on how we do things with friends and groups and stuff like that. So I think that over time we will get this right. It's not that we are blind to this, but nothing this holiday.

We've heard that the 100 friends limit had to do with backwards compatibility with Xbox 1 games on Live, specifically Halo 2 I think was the game mentioned. First, could you confirm that that's actually the reason we have this 100 friends limit? And second, does that same backwards compatibility concern, does that affect your ability to implement a feature like Groups?

So the ability to implement a feature like Groups is different than that. It's got other different types of complications. The friends list, you know the friends list from the original Xbox games was built into the games. So there are challenges there as you kind of alluded to, so that is one of the challenges to that. But with that said it's something that we are looking at. It's something that we actually have heard people on. You know, the other thing I will tell you – and we always sort of give this answer when we're asked this question and I think I've been asked it ... I don't know how many times, but ...

More than 100 I'm sure.

You know, probably. [Laughs.] Probably just about 100 – is that most people don't even have 50 friends much less anywhere near 100 friends. Now I know popular journalists like yourself, you know, are bucking that number all the time. The average customer isn't beating down our door to add 120 people to their friend's list.

Every time I think about that answer I think about the average number of friends on Facebook, where most people have over 100 friends. [Editor's note: Facebook says that the "average user has 120 friends on the site."]

Yeah.

So I sometimes feel like it's not necessarily an issue of people not knowing or not having that many friends on Xbox Live, but rather it has to do with finding those friends on Xbox Live. I think the Facebook integration is going to ameliorate that process, and that hopefully will be really cool. You'd find out that a friend you have on Facebook is also on Xbox Live and add him. That's really neat, but I feel like if there were more tools and systems in place to help that process that you would see a much higher number of people on friends lists.

No, I think that is a really fair point and I agree with you about the Facebook thing ...

Right, if you had Groups then you could make a group of your graduating college class and if there were 2000 people in that group then, all of a sudden, you might start adding more friends than you are adding now because the process now is really ad hoc; it's not really conducive to the kind of social networking you get on a computer.

Yeah, very compelling points, yeah, I hear ya ...

These ideas are freebies, I'm giving these to you ...

Absolutely, I'm waving the white flag. I don't know if you can see it, but I am. I don't know, all I can say is that I think we may be held to a bit of a high standard in this space because we have innovated so much and people are always saying, "I want more, what's next?" You know, if you take a deep breath and think about all the stuff we offer and all the improvements we made last year and this year and you match that up with the competition I think we have a lot to be proud of and we've innovated online so hopefully you can cut us a little bit of slack on getting to the rest of your list. But it is being addressed and we're absolutely aware of it.

So, here's something that I want to try and cut you slack on so I'm hoping you're going to give me a nice answer: pricing of the WiFi adapter? It's not being included with this new Elite SKU. The price is currently $99 MSRP. Is Microsoft planning on cutting the price of the WiFi adapter?

We have not announced any change to our accessory pricing as part of this announcement.

You're killin' me ...

That is your answer.

You're killin' me.

Well you know you don't have to buy ours, I mean there are other solutions on the market ...

Sure. The thing is, if I go and buy a USB adapter for an old laptop, it's $9.99. But then if I go and buy Microsoft's version it's $99.99 so there seems to be a pretty serious price disparity going on. Consumers aren't dumb and they see this one on the shelf that's $9.99 and here's this other USB adapter that's right next to it that has Xbox branding on it and it's 10 times the cost, that's a little difficult to rectify. And I think – especially with the $300 Slim coming with not only a Blu-ray player but built-in WiFi – I think a lot of people expected Microsoft to include that in this new SKU. To be honest, I'm surprised that it's not at least being lowered.

Where do you think you guys stand relative to PSN now? Sony's had a couple years to improve their service, you guys have obviously been busy improving Xbox Live but Xbox Live is a service we pay for so I think those improvements and that superiority, if you will, is in a lot of ways expected. It's a paid service. So relative to PSN being totally free and offering free multiplayer where do you think you guys stand?

You know, I think it continues to come back to what it always has been and that is you do get what you pay for. So I think if you ask customers they'll say Xbox Live is hands-down the top online service, with better online multiplayer gaming, better digitally distributed games, more exclusive content, better entertainment options. That's where their friends are, that's where they built their communities. Better ways not just to play games together but to take your party from experience to experience. We built Xbox Live into the platform and that's enabled us to innovate in ways that frankly the competition can't and will never be able to do.

I think that online will always be a significantly competitive advantage and it will be the reason why you're buying Madden on the Xbox 360 rather than the PS3 because of that. And it's probably the reason why if you're going into the market today and you're going to buy one console, you know we think that people will choose the Xbox 360 because they can get that complete games and entertainment experience at a great value.

We're going to continue to push and innovate there. It's in our DNA, it's in our core. It's what we are. We're a software company, so that makes sense that is something that we will always shine in.

I know we're running up on our time here. I just have a couple more questions that are kind of outside of your immediate field, but I wanted to take the opportunity to ask them anyway.

PR: Sorry to jump in, I think we have time for one more, if that's alright.

Alright, well, I'll make it – I'll just bundle it all into one.

AG: [Laughs.] He's good; he's a pro. Here comes the value bundle question.

That's right. I'm including all sorts of stuff in this new question. As recently as last year, Microsoft was hiring for the Peter Jackson Wingnut project for what I believe was going to be called "Halo Chronicles." That project, according to Peter Jackson, had been canceled and they've moved on. Microsoft is saying that it's on hold. Do you know and can you say what's happening with that project? Is that still an Xbox 360-exclusive that we can look forward to?

I don't know except for what we said probably about it being on hold. To be honest, I'm not actively involved myself in the management of the Halo franchise. There are some other people that live and breathe that inside and out. I don't know more details than that it is on hold for the time being. I think there's a lot of things planned for Halo in the future but I don't think we have a lot of specifics around that to speak to.

Had to ask! Thanks for your time, Aaron!