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Microsoft executive Shane Kim touted the New Xbox Experience coming next week as the company’s attempt to broaden its reach and shift its Xbox Live online gaming service from a multiplayer matchmaking service to a broader entertainment social network.

Kim, corporate vice president of Microsoft’s games group, gave the update on Saturday at the Play conference at the University of California at Berkeley’s Haas School of Business (where yours truly also moderated a panel). Kim said that the update to Xbox Live launching on Nov. 19 — which will allow people to communicate with each other through cute avatars, or online characters — will make it far easier for players to socialize and discover new entertainment such as videos and music.

While Microsoft has done well with hardcore gamers, Kim acknowledged that the company has had a harder time getting the broader audiences that Nintendo’s Wii has snared. It isn’t giving up on those new gamers and hopes to attract them with the simplicity of how the Xbox Live user interface lets them make new friends and discover new kinds of media.

“I believe to be the leader in interactive entertainment, we have to expand well beyond gaming,” he said.

That means new kinds of genres, such as music and fitness. Music has come from almost nowhere to 16 percent of the business thanks to the success of Rock Band and Guitar Hero. Guitar Hero has generated more than $1 billion in the past two years. Players are downloading 3.8 million songs a month for both Guitar Hero and Rock Band, and many people are discovering music for the first time with the games.

As for fitness, that’s a bigger leap for game developers. Nintendo’s Wii Fit, launched this spring, paved the way for new thinking in that genre.

“I can tell you how that conversation goes at Microsoft. They say, ‘I don’t think that’s a game,'” Kim said. “But the guy at Nintendo says, ‘I don’t care. I’m selling a whole bunch of that stuff.'”

Kim noted that retailers contracted 3 percent in the month of October but the U.S. console games industry grew 18 percent.

“No one is saying the industry is recession proof,” he said. “The next couple of months are very telling and important. Consumers are tightening their belts. We’re still somewhat hopeful about our industry. People still want to be entertained.”

He recalled that Microsoft launched the original Xbox in the economic downturn of 2001, a year when the game industry grew 43 percent, and noted that the industry is on track for solid growth in 2008. He said 50 percent of industry sales still occur in the fourth quarter and 25 percent of all sales are in December.

Part of the reason the Xbox 360 will continue to do well is that it embraces the increasingly popular digital convergence, which has given rise to phenomena such as iTunes, Netflix, Tivo, YouTube and digital distribution of games and game-related extras. With the Netflix downloads on Xbox Live starting next week, gamers will have more than 15,000 movies available to rent or purchase.

Kim noted that it once took 10 to 15 people nine months to make a game. Kim said he laughed when he heard that Electronic Arts spent $10 million on a Wing Commander game years ago. But now the company routinely spends $20 – $25 million developing games with teams of more than 100 people working for two or three years. For Halo 3 class games, the investment is close to $100 million, counting both development and marketing budgets.

“That’s nerve-racking,” he said. “A lot of things can go right and a lot of things can go wrong.”

But the payoffs are getting bigger. Halo 3 generated $300 million in revenue in one week a year ago. But Grand Theft Auto IV broke that record in April, selling $500 million in one week. And, said Kim, home game consoles are now in 45 percent of U.S. households, compared to 37 percent in the last generation (although, he didn’t cite a source on that statistic). That’s why big companies such as Disney, Viacom and Warner Bros. are investing more heavily in games.

Kim said that it never pays to bash Nintendo. Rather, he said he loved Nintendo because it’s broadening the audience and is showing Microsoft what it needs to accomplish. He said that with 14 million members connecting to Xbox Live in the past six months, the mass market advertisers are starting to pay attention. He notes that HBO and Cinemax have 40 million subscribers, while Sirius XM satellite radio has 19 million, and Netflix has 9 million. Since 2001, Xbox Live has generated more than $1 billion in revenue.

As for the Nov. 19 update, Kim said, “God willing, it will work.” He said it’ll be interesting that Netflix will be available on the Xbox 360, via the postal service, and through Netflix’s Roku set-top box.

“The lines are blurring tremendously,” he said. “It’s going to be a fascinating time as all of these different media evolve.”

Although the Microsoft-supported HD-DVD high-definition video format lost out to Blu-ray, Kim said that the costs of the Blu-ray player have handicapped Sony’s PlayStation 3. He said Microsoft made the right decision by not including HD-DVD or Blu-ray in its box and offering HD-DVD as an accessory. (It has discontinued the accessory). He also said that digital downloading of movies to the Xbox 360 over the online connection would likely prove more important than Blu-ray in the long run. He reiterated that Microsoft has no plans to put Blu-ray into the Xbox 360.

Asked how long Microsoft would keep making the Xbox 360, he said, “One day longer than the lifespan of the PlayStation 3.” That means that Microsoft will invest in the Xbox 360 for a long time and feels no pressure to offer a new machine.

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