“Hail Mary”
XBOX - 12-21-99
In December 1999, the Xbox team produced another report, which they titled “Hail Mary” (with the quotation marks.)* The report offered a close look at the alternative strategies and relative risks and rewards of the console strategy. It also contained what almost sounded like another ultimatum on one of the early slides.
*In this slide deck there were two separate spellings of the console name: XBOX and Xbox. See the whole series of slides in the Online Appendix.
Reasons to Proceed
• The Gamer community is the right constituency to go after. Enthusiast Gamers = innovation
• They are engaged and passionate
• They can be relied upon to participate
• They might be the only end user community with influence
• All other avenues to the home are encumbered by cable, phone and portal (?) companies
• XBOX is a chance to start our own independent asset base in the home
• It is unclear what the long term value of 43 MM installed XBOXes will be
– XBOX will not terminate a fat pipe connection
• MS will have 3 boxes: XBOX, Dishplayer, STB
• STB & TV-Pack is what ATT, Charter, ct al license
• However, cable modem and DSL suppliers will lock down (make proprietary) their fat pipe connections.
• XBOX will be downstream from either a TV or a PC broadband connection
• The XBOX 8 year loss is $900MM
• XBOX performance is at parity with PS2
What Success Is / Isn’t
• Goals:
– Establish our brand and key standards in the living room through XBOX 1.0 (earn a seat at the table)
– Develop long-term assets - content franchises, IP, and a profitable online gaming (and download) service
– Ship 43MM consoles and 106MM+ games over 6 years (8 years)
• Non-Goals:
– Uber-unification
– Pushing productivity apps into console space
– Fix PC Gaming fragility
Required Outcome & Recommendation:
• XBOXP&L:
– Our decision: Whether to invest (lose) $900MM over 8 years to build a $4.6B/year business with sub 5% RM
• We can only proceed if Console success is fundamental to CG’s success
– If un-modeled upside entices us (up-coming slide)
• Final, Final, Final decision needed
– Unified “closed-ranks” if we proceed:
• Nothing but support and personal commitment from you guys
• Announce: CES / GDC
• Financial Outlays:
– $ IB for Hardware (same as 9/29)
– More headcount and / or ISV royalties
• Requested 110 incremental on just XBOX 9/29
• That number has increased to 315
• Total HC (with EBU) now 590 people
– $1B in content acquisition
One slide mentions un-modeled upsides, which included opportunities that might add revenue and/or popularity to the Xbox model, such as partnering on an MP3 player, getting $10/month subscriptions to Microsoft Game-Zone, a $49 browser/keyboard offer, and several more, including still offering the opportunity for OEMs to buy Xbox motherboards and build systems while paying the usual OS royalty. There was even the idea that these OEMs could produce a dual boot PC that, on the one hand would be a normal PC capable of running productivity software and on the other hand, operating as a dedicated game console.)
A “yes” would mean a commitment to announcing the Xbox at the upcoming CES (Consumer Electronics Show) and GDC (Game Developers Conference). In addition, it would require $1 billion to pay for hardware, another billion for content acquisition, and a head count of 315 for Xbox and, with the Entertainment Business Unit (Ed Fries’ division), a total of 590 people. The hardware and content acquisition numbers were unchanged since late September, but the head count had increased by 205 people.
The report also included slides titled “Reasons to Proceed” and “Reasons to Cut & Run”.
Reasons to proceed? Gamers are engaged, passionate, reliable, and possibly “the only end user community with influence;” other avenues into the home are already encumbered (cable, phone, etc.); Xbox could represent an “independent asset base in the home.”
Reasons to cut and run? The long-term value of Xbox was unclear, even based on an installed base of their target—43 million units; Xbox losses of $900 million per year; Xbox is “at parity” with the PS2, meaning that it wasn’t better, just equal.
It is interesting to see what they considered goals for success, versus those they weren’t concerned with. For instance:
• getting a “seat at the table” in the living room by establishing the Xbox brand;
• developing long-term assets, such as game franchises, IP and a profitable online game and download service;
• shipping 44 million consoles and 106 million games over the life cycle of the console (6-8 years).
In other words, they weren’t concerned about unifying gaming around the Xbox, including Office and other Microsoft productivity applications, or helping the PC game division become more robust.
There were several slides offering alternative strategies, such as putting $2 billion into Sega in exchange for equity and developing Xbox with them. Another idea, based on the concept that “it’s all about content” was to create a new company in Japan (with majority ownership by Microsoft) to bring together game rock stars like Miyamoto, Yu Suzuki, Sakaguchi and others. Then have this “NewCo,” as they referred to it, ship the Xbox. Other ideas centered around developing a strategy around Windows CE or abandoning the console altogether, for the moment at least, and concentrating on becoming a software powerhouse like EA.
The final slide in the main deck was called “Next Steps”:
• This is a 5+ year decision / commitment
- “Grudging acquiescence” isn’t good enough
• Create the XBOX—Games Division
- Get the organization decisions finished
- Move us—get us into one space
Another group of backup slides included some technical specs, justification for using Windows NT as the basis for the Xbox OS, suggested peripheral devices for Xbox, and strategy rundowns for both first party and third party titles.
There was no immediate Christmas present for the Xbox team, however. Although the Xbox concept remained technically alive at the change of the millennium, it was not yet fully approved and funded, meaning that it was still just an idea, but not a project—a noun, not a verb. More birthing pains were required, and labor really began a couple of months later in a contentious meeting on the day normally reserved for hearts and flowers—Valentine’s Day 2000.
A Hard Decision
One of the issues that was sure to show up again in the next, and possibly definitive meeting was the inclusion of a hard drive in the console. No console manufacturer had previously used a hard drive in a console, but the idea of including one in Xbox was present from the beginning. The first mention of a hard drive that I could find was in a slide deck from April 1999, which was at the beginning of the “Bill” meetings.
The main area of contention was price. On a console that would retail somewhere in the neighborhood of $300, the hard drive at $50 dollars a pop was a massive extra cost. Besides price, the main argument against including a drive was that it wasn’t necessary. After all, every previous console manufacturer had done quite well, first with cartridges and later with optical drives. Perhaps because Microsoft was at the time primarily PC focused, the idea of using a rewritable drive just made sense. Add to that the fact that back in April 99, when the proposed system was just as likely to have become a specialized Windows PC, a built-in hard drive was completely logical.
As the project trended toward a console instead of a Windows PC, the concept of the hard drive remained in the plan, but support for it was nowhere near unanimous. One of the problems pointed out by opponents of the idea was that, unlike other components of a console system like memory, graphics chips, and motherboards, hard drives do not reduce in cost over time. Part of the business of consoles depends on the fact that a lot of early components will get cheaper over time, meaning that over time the cost per unit goes down before the console’s retail price is inevitably reduced. Not so with hard drives. For 50 bucks you could buy an 8-gig drive at wholesale this year. Next year, the drive will still cost you 50 bucks, but it might be a 16-gig drive. So you get more for your money, but you can’t get a cheaper price per unit.
Another downside to the hard drive argument was that, even if you did add a higher-capacity drive for the same price, you couldn’t get any benefit from it. For instance, suppose the initial system released with a 10-gig drive and the next year only 20-gig drives were available at the lowest price. You couldn’t essentially reward later purchasers at the expense of your earliest customers, so the result is that every future drive, whether it was 20, 40, or 80 gigabytes, would have to be reduced functionally to 10.
Ed Fries and J Allard were big proponents of the hard drive. They saw the potential of having the drive—downloadable patches, better and more convenient storage of games and saved games, expansion packs—but ultimately the fixed price of the hard drive created a difficult tradeoff—a hard drive vs more RAM.
There were good reasons for increasing the RAM on the machine. According to Stuart Moulder, who sat in for Ed Fries at one of the more heated “Bill” meetings on the subject, they made the call to go with the hard drive, but in retrospect he realizes that Bungie—if they had been part of Microsoft at the time—would have opted for more RAM. “Limitations on RAM in the Xbox was a large part of why Halo looks the way it does. It was very repetitive in its look and feel because we had limited memory for textures and geometry. So the tradeoff was you could either have super-fast load times between segments by reusing assets that were already in memory, or you could have a wider variety of textures and so on, but you would have to hit the DVD for them with an impact throughout the game.”
At the time, when Gates turned to him and said, “You’re the games guy. You’re going to make the software for this. Which would you prefer?” Moulder admits that he didn’t have the definitive answer. At the time he did his best to enumerate the benefits of the drive.
Bob McBreen spent many hours trying to figure out how to manage costs on Xbox, and the hard drive was one of the big issues. “We had a spreadsheet that had Sony’s costs in it, and then had our costs on it, and they didn’t have a hard drive, and we did have a hard drive. We spent hundreds of hours in meetings trying to figure that out.”
According to Mike Abrash, who was a staunch opponent of the hard drive, “I thought it was going to be a fifty dollar paperweight,” the decision ultimately went in favor of the drive when Allard “wrote this very long treatise about all the things you could do with a hard disk, and that was kind of the end of that discussion.” Abrash contends that, although Allard was very good at imagining things and very articulate as well, many of the things he envisioned in his treatise never came to be. Abrash also points out that for the Xbox 360 the hard drive was optional. On the other hand, he admits that customers liked the hard drive option in the 360, but still contends that it wasn’t necessary.
Broadband
Another Xbox feature that had been proposed from the start, but that was controversial, was the inclusion of a broadband Ethernet connection. Some people favored a built-in modem, but proponents of the Ethernet connection argued that widespread broadband support was imminent. As previously noted, this was one of the major areas of contention between Allard and Gates. In many ways, ditching the modem in favor of an Ethernet port was a bet. The bet was that there would be large-scale broadband penetration into people’s homes. It turned out to be a smart bet, but if the timing had been too far off the mark, it would have been a very bad one, and although they made the right choice, it didn’t become clear how completely right it was until a year after Xbox launched, when Xbox Live started up.
Bandwidth Penetration and the 3 Bets
Robbie Bach says, “The interesting thing is that for Xbox the idea of an online game service was part of the original plan, but when we launched there was no online gaming. The only thing you could do… we had this very funny cable you could buy that would enable you to string Xboxes together. So people would have these Xbox parties where they’d bring TVs and Xboxes into a house and go and get some rooms and string cables together and then play multiplayer gaming that way. Particularly on Halo, people forget, the first version of Halo had no online service support.”
Don Coyner was involved in these early modem versus broadband arguments, although he moved out of marketing soon after the Xbox launch. “Those were heated debates back and forth. There was a faction who looked at the numbers and said, ‘So few people have Ethernet, how do we ever get traction when there’s so little adoption of Ethernet at this point?’ And certainly the games guys were all hardcore on it. ‘There’s no way you can have dial-up and have any kind of successful service.’ And the idea of doing both was discussed for a while, but that was like, ‘That’s ridiculous. Now you’re asking people to develop for two different things. That’s impossible, and you’d have to build a service for two different things… that’ll never work.’”
Meanwhile, the critics were correct to an extent, but in the end the Ethernet proponents won. Despite the fact that broadband access was still very limited at the time they were beginning to work on Xbox and Xbox Live, and the numbers they were seeing suggested that broadband penetration would not be sufficient to justify their risk, they saw some reason to hope by analyzing the trends in broadband adoption and changes in certain critical technologies. And so, Boyd Multerer, who later led the Xbox Live team, says, Microsoft made three “really big bets” on the future technology:
1. Bandwidth penetration was going to happen.
2. Data center bandwidth costs would fall.
3. Servers would improve so that they could handle the load.
Allard was adamant that broadband was the only way to go, and, certain that he would be able to convince Bill Gates of that fact, he made a $1000 bet with his friend and partner Cam Ferroni in October 1999 that he would succeed by December. He lost that bet, but not by much. Though it did take a little longer, ultimately Gates did come around.
Since large-scale broadband adoption had not yet occurred, there were a lot of unknowns, including what would happen if they succeeded. “We were worried about internet providers blocking our traffic because we knew we would make a lot of traffic, especially compared with most normal households,” says Multerer. “And while we were worried about that, we also thought that ok, they actually want people to use a lot of traffic because that will push broadband adoption and give them all kinds of opportunities.”
Of course, the inclusion of the Ethernet port at the time was about planning ahead, making bets, and moving forward. It was also clear that there was still work to be done just to get final approval for the console itself. At the time, nobody knew for certain that the their bet on the Ethernet port would ever be fully realized, and without it the effort to create a true online service would not be feasible.
The “Hail Mary” did not result in approval, but it was only a matter of time, and a different holiday than Christmas.