Tea Leaves

Editor’s Note: An anonymous source dropped this in my mailbox. I cannot vouch for its authenticity, but I wanted to share it with my readers because I thought it was an interesting read. “Xenon” is the codename for the Xbox 2.

To: xbox-exec@internal.microsoft.com
Cc: Ballmer, Steve
From: Samuelson, Johnathan
Subject: Things Xbox can teach Xenon

Team,

The Xenon product launch is rapidly approaching. Everyone on the team has been executing at 100%, and I have every confidence that the hard work we’ve put into this product is going to translate to meeting and exceeding market expectations. When you’re pushing so hard to make sure we ship it’s easy to lose track of the big picture. So I wanted to take a few moments to reflect on what we did right when we launched Xbox, where we missed the mark, and how that experience influenced our decisions on Xenon.

From the 50,000 foot level, the Xbox launch was an unqualified success. Our stated and actual goal was to establish Microsoft and our Home and Entertainment Division as a serious player in the game console marketspace. We accomplished that goal in record time. In a space where our main competitor had successfully bullied competing products off of the shelves, we established a beachhead and gained parity in presence in both online stores and retail outfits. (The marketing and sales guys deserve huge accolades for achieving this deliverable — even today, holding a minority market share, you can walk into any retail outlet and we’re holding nearly half of the shelf space. If your engineering leads complain about the tight schedule, remind them that the sales and marketing guys held up their end when it counted, and we need them to do the same.)

When we zoom in to the implementation details, the picture isn’t quite as rosy. While our execution was completely to plan, the plan itself had a flaw. That flaw centered around the decision loop involving game developers.

Video game publishers are unreliable. A key aspect of the design cycle for Xbox involved focus groups with the game publishers and program managers to discover what features would induce them to develop for the platform before it was established. The developer feedback was incorporated into Xbox. Because we believed the developers, we got screwed.

The most obvious example is the hard drive. Game publishers swore up, down, left and right that if we could include a hard drive in the system, they would use it to bring entirely new, innovative forms of gameplay to the platform. There would be games developed for Xbox, they said, that wouldn’t even be possible on competing platforms. On the basis of this feedback, we took a leap of faith and included a hard drive in Xbox. The hard drive increased the size and unit cost of the console, and decreased MTBF, which in turn increased our support load. Overall, it has been a huge cost drain.

And in five years you can point to only one single title that uses it in an interesting way.

Our friends the game developers have used this component, subsidized by us at great expense, as a glorified built-in memory card. Their games are developed to support the least-common denominator current-generation hardware.

It was an expensive lesson, but at least now we have enough market penetration to know that while we should always take game developers seriously, we should not bet the business on their being honest or competent. Those publishers that came to our platform early did it for a couple of reasons.

First, our development environment is light-years ahead of the competition. Anyone who could use the DirectX API — which is everyone in the world — could write a game for Xbox. Total Cost of Development for Xbox was thus significantly lower compared to the competition. We’ve all agonized over the Xenon guts being swapped out, but as you know, we are 100% committed to providing a completely transparent development experience for the publishers. Our APIs will continue to be easier to use, more consistent, and more powerful than our competitors’.

Second, they were afraid that we might succeed, and they’d be left standing at the station, watching us pull away.

We managed to push this second point a bit with our farsighted decision to strongly fund and support our own Microsoft Game Studio. In addition to the obvious financial consequence that our per-unit margin is higher on games we’ve developed in house, Microsoft Games represents our main stick for goading lazy game developers into actually using the features our platform offers. One successful game demonstrating that customers will buy a game with a given feature is worth two hundred developer seminars. The struggle with Electronic Arts over Live support reveals this clearly. It took a lot of work, but EA will never ship another Xbox sports title that doesn’t support Live. Even though our own sports titles were not revenue leaders, we must not underestimate their impact on the market as technology leaders.

The other role of Microsoft Games is to act as market expanders. Our research shows that EA Sports, for example, sells to the same consumers over and over again. That’s a nice market to have. Microsoft Games productions are designed not just to sell to the hardcore niche, but to expand the market. There are more people that don’t play console videogames than do. The game publishers, and the other console developers, aren’t seriously aiming for that market. We are. We think that given the right titles, we can find those consumers, sell to them, and bring them online with us.

Which brings us to Live, which is the crown jewel in our product line. It is no exaggeration to say that Live is the Home and Entertainment Division. Without Live, we are just another hardware and software vendor. With Live, we are an ISP that doesn’t actually have to spend money to move packets. The current Live service is engineered to take us through our most optimistic Xenon projections. We will be about halfway through Jakarta’s life cycle before we have to sink significant capital to increase Live capacity. Live requires traffic to flow on our infrastructure only during the meetup and resync phases of the protocol. In-game traffic is peer to peer. Live is our future: a continuing income stream that is almost entirely margin for a minimal customer support load. It’s pure gravy.

Our goal for Xenon is, and must be: 100% attachment rate for Live. That’s the brass ring.

You, I, and Steve all know that we won’t actually reach 100%, but that’s the goal. The hardware will make getting online easier than they can imagine. We’re going to push the customers before they buy Xenon. We’re going to push them when they open the box. The parameters of the offering are still up in the air, but as far as I’m concerned, 6 months free isn’t out of the question. Every step of the experience is going to let the customer know that if they don’t join Live, they will regret it forever. Live represents the difference between our product and the competition. Live represents an experience you share with your friends. The competitors’ products are something you use to sit in your house and play with yourself.

Innovative games, easy development for third party publishers, and Live. That’s the big picture, guys. That’s the message we want to send over the next ten months. The gaming press will try to define the debate in terms of who can push the most pixels. Even though we’ll win those comparisons, that’s not on-message. While you’re heads-down meeting your commits this summer, take a minute every so often and just repeat to yourself: Innovation, ease of development, and Live. If we hit those marks, we win the war.

That’s the story. That’s where we’ve been, and you all know where we’re going: to the very top of the market. So let’s get out there and execute, execute, execute!