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I moderated the panel, which includes former chief Xbox officer Robbie Bach, former Microsoft Game Studios head Ed Fries, and his successor Shane Kim, also a former head of Microsoft Game Studios.
I was there at the Xbox’s beginning, writing the first story about how Microsoft would spend billions of dollars on games. And I wrote two books, Opening the Xbox and The Xbox 360 Uncloaked (sadly both out of print), about the making of Microsoft’s first two game consoles.
So it was fun to revisit the topic nearly 20 years later of how Microsoft made the key decisions to get itself into the game console business back in 2001.
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Here’s an edited transcript of our complete panel. This is a longer version of the interview that ran on the E3 Twitch channel.
GamesBeat: Hello E3, this is Dean Takahashi, the lead writer for GamesBeat at VentureBeat. I’ve been covering games for about 24 years, and covered tech about 30 years. I was around when the original Xbox launched, and had the opportunity to write a couple of books on the Xbox business. The first one was Opening the Xbox. I’m pleased to have this panel, a reunion of Xbox leaders here. I’ll have them introduce themselves.
Shane Kim: It’s great to be here. Dean, great to see you after quite a few years. I’m Shane Kim. I spent 20 years at Microsoft, and most of that time, thankfully, was spent in the Xbox business. I joined the games business with Ed in the ‘90s before there was an Xbox. When Ed retired I took over the leadership of Microsoft Game Studios and got to participate in an incredible time in Xbox history, with the launch of Xbox and Xbox 360, where we competed pretty fiercely with Sony and had some great times, including the launch of Halo 3 in 2007. It’s great to be here.
Robbie Bach: My name’s Robbie Bach. Like Shane, I was at Microsoft for a little over 20 years. I spent some time in the Office business, and then moved to the consumer area in 1997. I joined Ed and Shane working on the PC game business, and when Xbox got started, there was a guy named Rick Thompson who was gonna run it, but Rick decided to leave Microsoft, so suddenly I was Chief Xbox Officer. Did that for about five years through Xbox and Xbox 360. Started managing Xbox and some other things. Peter Moore took over. You’ll remember the history after that. In 2010 I left Microsoft, but it’s great to be back with my pals at E3.
Ed Fries: I’m Ed Fries. Like these guys, I was at the company about 20 years, starting in the mid-’80s. I took over the games business in the mid-’90s with Shane and we grew it as much as we could on the PC side. Then this crazy Xbox project came along. We all did our best to make it happen. I left the company in 2004, and since then I’ve been doing advising and board stuff. Recently I started a venture fund called 1UP Ventures. That’s what I do these days. We invest in small game companies.
GamesBeat: Still betting on the games business?
Fries: Absolutely. I love the games business.
GamesBeat: Let’s start with Robbie. What do you remember as the most important lesson of creating the Xbox?
Bach: Well, I’m not the technical person, nor am I particularly a gaming person. My lessons are a bit more on the business side. The two big ones I took away from this time period were, one, strategy is really important. The first version of Xbox didn’t have a lot of it. It was just about getting things done. The second version, we focused on strategy.
The second thing, I’d say, is it took us quite a while to build a culture as a team. Xbox went from zero to 100 miles an hour really quickly. We hired a lot of people, and we just — there was a lot of incredible individual talent, and not a lot of good teamwork at the beginning. When we got the team working better together, things really started to move. Strategy and teamwork are super obvious lessons, I know, but there were a lot of scars in those early years. That’s what I took away from it, and what I use in my consulting work now.
Kim: Content is king. We learned that. This is where we did a lot of things really well with Microsoft Game Studios. We figured out that exclusive content was going to matter in the battle, especially versus Sony. We created a first-party content advantage for some time there, especially around titles like Halo and Gears of War and Fable and so forth. Some of those big hits in the early days drove the success of Xbox, and especially Xbox 360.
Fries: The first Xbox was about us running as fast as we could to meet a date. Then after that we could breathe and reflect on all the things we did wrong. I think you really could see that thinking expressed in Xbox 360 as we saw it do better.
GamesBeat: Shane, what are some contributions that your colleagues here made to the whole effort? What do you give them credit for?
Kim: I’m not going to say this just because he’s on the call, but Ed deserves a ton of credit. I owe a lot to Ed personally and professionally. Ed brought me into the games sphere in the ‘90s. Like Robbie, I’m not a technical guy. I’m not a gamer. That’s well known. Ed gave me a chance, first starting on the business side, and then on the content side, which led to a lot of fun and success for me personally.
I think back to the start of the Xbox project and getting that approved by Bill and Steve. Robbie can speak to this more, but Ed was one of those guys who drove it home. He first had the vision for Microsoft becoming a bigger player in games, first on the PC side, and then when the Xbox project came along he drove that. Without Ed’s credibility with Bill and Steve, that project wouldn’t have happened. Ed also gets a lot of credit because, as we learned over time, content really is king. We didn’t have the kind of content that would drive console success. He, and others of course, found Halo and Bungie and brought that into the Microsoft family. That clearly was a critical success factor for us.
The other guy I would credit, who deserves a lot of credit, is J Allard. While I wasn’t as privy to everything J did, when he was running the platform he had the vision to drive Xbox Live. He deserves a lot of credit for us not putting a phone jack in the back of the original Xbox, sticking to the Ethernet connector.
Robbie of course deserves kudos, because doing a project like Xbox like Microsoft, with a really different hardware component, really different content, it required the air cover that Robbie was able to provide. Just getting the project off the ground in the first place is what I remember the most. Everything else that happened after that, we were committed to it. We worked through a lot of problems, obviously, and learned a lot as we went along the way, but just getting it done, these two guys deserve a ton of credit.
Fries: This project, to be successful, needed so many different areas of expertise. That’s why we were able to do it. It wasn’t any one person. It was bringing a team together, a whole bunch of different skills. I came with a product, making something, a technical background, and a passion for games. But I had never run a business before. Without Shane there’s no way we would have grown the game business from the mid-’90s like we did. The conversation would go, “What do you want to do?” “Well, I want to grow.” “Maybe we should do some acquisitions?” “Great, how do we do that?” Shane would figure it out. I’d say, “This is a company I believe in, their team and their products.” He would make it happen, talking to the people in the part of the company that did that.
Robbie, with sales and marketing, plus, as Shane said, navigating the upper management, which should not be underestimated in a giant bureaucracy like Microsoft — that was critical to our success. And there were many other people involved too, like Todd Holmdahl, who led the hardware team. So many different things had to come together in a short amount of time to make this happen. It was a team effort.
Bach: I was talking with Phil Spencer the other day. He said that sometimes he would ask who was the father of Xbox. The answer you just heard is the right answer. There was an interesting collection of people as a team. They weren’t actually particularly alike. Todd was completely different from J, from Ed, from Shane, from Phil, and from other people who played roles. Figuring out how we worked to the thing I said before, as a team, was super important. Everybody played key roles at key times. It sounds sort of cliche, but that’s how it played out. Shane and Ed absolutely played those key roles.
GamesBeat: One person that comes to mind, I’ll save all you guys here with this answer — one person who comes to mind as having the vision to get this off the ground, I have an admiration now for Bill Gates, being willing to lose something like $4 billion on the first Xbox. Who else has that kind of will these days? Apple never tried it. Amazon and Google? Not doing so great in games right now. It’s a hard business, and you have to be willing to risk so much money. It’s fortunate that you had that. But still, it’s a gutsy thing to do.
Fries: I might flip it around a little and say that once a company gets big enough, it needs to go after big projects. That was a problem at Microsoft at the time. They couldn’t find projects big enough to matter relative to the Office business and the Windows business. This was a project that was big enough to matter. Robbie could talk to this better than I could.
Bach: You’re spot on. I think both Bill and Steve — there were other people in the first two or three years of Xbox, senior leaders inside the company, who wanted to kill it. That’s not news. We were losing a lot of money. Wall Street wasn’t happy about it. People thought Microsoft was crazy doing hardware. But Bill and Steve, once they got on board at the beginning, were incredibly steadfast. To Ed’s point, I think it was the fact that it was so big. It was a chance to break through. They were willing to take those big bets.
Kim: I’d also add, and I think it’s different today when you look at Microsoft in 2021 versus 2000, it’s important to remember back then — I always thought Microsoft was a platform company, particularly then. We fought very hard to establish platforms like Windows and Office. We looked at the Xbox business opportunity as another one of those platform wars. Sony had incredible success with PlayStation 2. A large part of the company’s strategy was, we just couldn’t cede the home territory to Sony without competing in that space. That’s another reason why Bill, Steve, and the company were willing to make that investment. We just needed to go compete with Sony for the home platform.
Things have evolved differently, both in the home platform space as well as the company. We see things like Office on multiple platforms today, which I don’t think we would have contemplated back in 2000. It’s a very different time. But it’s important to remember that back then, we were about platform wars.
GamesBeat: Ed, did you see particular challenges that were surprising to you? Challenges that were underestimated at the very beginning?
Fries: We were all super-naive, which is kind of a good thing when you’re going into a project. If you knew all the troubles you were going to have at the outset you’d probably never do anything. I was used to that, I guess, getting in over my head, from back in my Office days and then trying to get out of there.
The biggest thing was that we had never made a console game. Now we’re going to make a console and a whole lineup of console games in less than two years. It was super-ambitious. Fortunately, we had a near-infinite amount of resources. You’d think that would make it possible to do the impossible. But it just made it somewhat possible, I guess.
In some ways, we got very lucky. We made a bunch of bets, and one in particular really came through with Halo. The hardware barely came together in time, as I remember it. There were a lot of moving pieces that just had to come together. When you take the net of it, we did pretty well on that first launch.
Bach: There were challenges everywhere. We didn’t have a supply chain. We didn’t have a real retail sales force. We didn’t have an operations team. Our best hardware at that point was a Microsoft mouse. We had some PC games, but no console games. Xbox Live didn’t exist. Broadband was just getting started.
Kim: Other than that, though, it was pretty easy!
Bach: I could go on for a long time. One thing I didn’t mention, which I think was particularly impressive and really changed the industry in a huge way — the bet on Halo wasn’t just a bet on Halo as a game from a company called Bungie. It was a category bet, too. First-person shooters were almost unheard-of in the console space. You had maybe one that had been successful up to that point. Now you look at the console space and it’s completely different. That, to me, was a transformative change. Kudos to Ed, Shane, and the Bungie team.
I didn’t understand that when we bought Bungie. I had no idea that we were not only betting on a content company, but betting the ability to create an entire new category on a console. That was new territory.
Kim: Most people doubted whether Halo could be successful on Xbox precisely because of that. It hadn’t been done. Halo’s impact also, like you said, can’t just be measured in terms of its success as a game franchise. Halo, in terms of driving multiplayer on Xbox Live when Xbox Live launched, was significant. When we joke that content drives hardware and platforms, it’s not really a joke. It had an incredible effect on Xbox and Xbox Live.
GamesBeat: Robbie, was there a pivotal moment where you thought this might actually work out?
Bach: There is. It’s a weird moment for me to identify, because it’s not when some game did well or we sold a bunch of units or something like that. But it was the E3- – I’m going to get the year wrong. I think it’s 2003, but it might have been 2004. Electronic Arts agreed to join Xbox Live. Everyone forgets that at the beginning, EA wasn’t on Xbox Live. I’m standing on stage with Don Mattrick and all these athletes from EA Sports, and then Muhammad Ali comes out onstage.
That’s a weird thing to identify, but it was just this — from that point forward, things seemed to roll downhill easier, even though Xbox 360 hadn’t shipped yet and Xbox was still struggling to get its footing. Somehow people walked away from that, in my mind, saying, “Okay, these guys are here to stay.” That made a lot of things easier. I know it’s not the fact that Muhammad Ali was on stage. But it’s an iconic moment for me, kind of burned into my memory. I won’t forget it.
We also did that very funny E3 video that now famously has Donald Trump in it. It was the same E3. It was a collection of forces at the same time.
GamesBeat: Trump gets credit for the Xbox?
Fries: Fortunately, I was gone by the time they were hanging out with Donald Trump. It must have been 2004.
Kim: To be clear, I never met the man. I’ll say, since we’re picking strange moments, and Ed was gone at this time — it’s not the best moment in our history, but when Xbox 360 had its technical issues after its launch and the company stepped up and provided, at that time, an unprecedented warranty, and the Xbox 360 survived and in fact thrived after that — that’s a real Tylenol moment for those of us old enough to remember. A brand can survive a hit like that and come back super strong. You forget that Halo 3 did not launch until 2007. Two years after the launch of the Xbox 360, and still Xbox 360 was able to get off to a great start. Once we survived that, certainly I felt very confident in our ability to compete in a big way with Sony and Nintendo.
Fries: Thank you for pointing out that I had nothing to do with the red ring of death. Sometimes that gets brought up and I have to–but for me, honestly, it would be the launch day of the original Xbox. Up to that point — E3 before that launch was pretty bad. Early reviews of Halo were sketchy. It wasn’t clear that the hardware was going to make it. We had 9/11, which we should probably talk about. There were a lot of things. To see everything come together with me standing there in Times Square with Bill Gates, watching him give away the first Xbox — almost magically, everything came together that night. It felt like this was the start of something big.
The final reviews came in for Halo and they were great. It set us off on something that still exists 20 years later. That was the start for me.
GamesBeat: I have a question for Ed here, a signal-to-noise ratio thing. I think you were the earliest guy to listen to the people who were talking about the Xbox idea: Seamus Blackley and Kevin Bachus and Ted Hase and Otto Berkes. Was it something that made you listen to them, as opposed to just more noise for you to hear as an executive?
Fries: We’d been approached by other groups. The Windows CE team did the Dreamcast project, and they wanted my group to make games for that. I said no. Honestly, they came in at the right time with the right kind of project. It was interesting to me. It was the right time because we had grown a lot in the PC game business. It was starting to look like it might be easier for us to grow more on other platforms than to continue to try to fight for share in PC gaming.
At the same time, they were talking about something that acted like a console, but was architected much more like a PC. That was appealing to me in retrospect, in a naive way. I was thinking it would be pretty easy to port our PC games over to this PC-like console. Of course the Xbox we shipped ended up being quite a bit less like a PC than they were originally pitching. I’ll just put it that way. It was an interesting proposal at the right time when I was already starting to think about our business moving to console in some way.
GamesBeat: I want to shift a bit to more modern times here, maybe with Shane. How do you see the game market evolving since your time, in both the expected and unexpected ways?
Kim: It’s obviously very different along a lot of different dimensions. One thing we recognized in the 2000s was that with HD, with online multiplayer and so on, the dev costs for games were rising dramatically. I remember back in the day, we sort of laughed about $10 million development budgets. Wing Commander had a $10 million budget and Ed said, “What?” Now, of course, you’re talking hundreds of millions of dollars. It led to some hard decisions in the 2000s. I had to close studios so that we could reallocate those resources toward other studios, because the teams needed to get so much bigger than they had been previously. We see that now. You have studios that are really, really massive.
At the same time, what’s cool is that you see people — Ed is connected to this community. Smaller developers, independent developers who have great ideas, who can find ways to create compelling games without a mega-hundred-million-dollar budget, but something much more reasonable, and have a lot of financial and critical success in doing so. That’s been interesting.
Mobile didn’t exist when we launched, of course. Mobile adds a different dimension both as a complementary platform, and in particular, as a competitive platform to consoles. As mobile devices become much more powerful, it’s easy to imagine a world where they play a role as another console platform, if you will, in the future. People are very adept at connecting mobile devices to the big screens in their lives. That puts pressure on, introducing new business models like free-to-play.
When people talked about watching other people play games, again, it’s like, “Really? OK?” Then Twitch comes along, and Amazon buys it for a billion dollars. That was a great acquisition for them from that standpoint. There’s a lot of things happening now. As people look at fewer and fewer games being made because of the development costs, and the developers and publishers thinking about their games as ecosystems, whether you’re talking about Fortnite or FIFA or Call of Duty and so on. How do they keep people in those communities connected for as long as possible, especially until the next release comes along? Things have evolved quite a bit from the days when we would launch a game, feed it for a week, two weeks, days, whatever, and go move on to the next thing.
GamesBeat: Who would have thought that you guys might have bought too few studios? Microsoft, in the last few years, had to bulk up and buy almost everyone, Bethesda and all that.
Fries: That’s something that hasn’t changed. The games are the core of everything you do.
GamesBeat: Ed, I think we’re down to our last couple of questions here. Is there a platform that you think leads the future?
Fries: Let me try to work my way around to that question. We’ll see if I can get to an answer. To go back and talk about what Shane was saying, and to really agree with that — the world has changed so much from the world of the early 2000s. At that time we were seeing–first of all, everything had to be in a box that fit on a shelf, which Robbie can talk more about than I can. You had to spend time with Wal-Mart and people like that. Working backward from that dictated how big and expensive projects could be. As Shane was saying, it was the rise of digital distribution that’s totally changed the business. We can make games at all price levels. We have unlimited shelf space.
When I dumped the business on Shane and left, it was looking harder and harder. We were going to have to make fewer and fewer games that were getting bigger and more expensive. That was going to limit how creative we could be, the creative risks that we could take. Now that we can make games of all scales on all these different platforms, it’s reinvigorated the game business. Now of course I’m working on the venture side, and that’s going to have a similar effect, where there’s another source of funding rather than traditional publishers for making games. That’s going to make more games, more different games available. I think the future’s bright.
My philosophy is not to try to predict the future. To your question about platforms, my answer is kind of boring. I try to make lots of different bets out of the venture fund and support lots of different platforms. Hopefully we’ll be there when the next big one takes off.
GamesBeat: A quick one for Robbie here. Do you see Microsoft’s gaming strategy as being very different today compared to the early days of the Xbox?
Bach: It’s changed quite a bit. Well, let me say it this way. Parts of it, Phil has really solidified some things that we did well, like content. Building the studio, working with content developers. That’s the place where Ed and Shane added so much value, and Phil has gone back and reinvested in that. He’s doing a really good job of that. Some of it is a continuation of some early successes we had.
But boy, cross-platform, the way they’ve evolved Xbox Live, the way the business model has changed, it looks nothing like when we were there. Nothing like it. Even inside Microsoft, Microsoft has become more of an enterprise place since we left, and yet gaming is more important there now than it was when we were around. That’s an interesting dynamic. I think Satya looks at Phil and the gaming business as people who are out on the cutting edge of technology. They’re driving new trends and new ideas. Those ideas could come back and help the rest of the company.
In many respects — maybe he’ll watch this, but probably not. Who knows? Phil deserves a lot of credit for shaping what I think now is a great business for Microsoft. Phil worked with Shane and Ed and learned a lot from them, but I think he’s put the business in a very good place.
Kim: I hope he doesn’t watch this, because I’m going to say nice things about him, but he’s done a tremendous job with the Xbox business. You have to remember that he took over when the Xbox One did not have a great launch. Subsequently, we lost that generation by quite a bit, which was very — for me personally, it was very disappointing, and probably for Ed and Robbie as well, since we were there at the start. We’d helped build Xbox 360 to parity with Sony.
The game has changed now. It used to be that it was all about market share. We wanted to beat Sony. But today I think the leadership recognizes that there’s much greater value in communities of users and customers. You only have to look at the Minecraft acquisition. The $2 billion they spent a few years ago when they made that acquisition looks like peanuts today when you look at the valuation of a Roblox, for example. That was very prescient, to make that acquisition. The investments in content are exactly like that. It’s not about the Xbox hardware. It’s about how many faithful, loyal customers we can serve as Microsoft.
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