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Innovation & Design

MS Game Studios Head Grades Xbox at B+

Shane Kim discusses Sony, 360 and new hardware possibilities

How would you sum up 2006 for Xbox 360? If you had to give it a grade what would it be?

Shane Kim: I think I'd give us a B+. I think it was a great year in a lot of respects. We hit our targets that we talked about in terms of 10 million consoles sold and a library of 160 titles available and be well on our way to hitting 6 million members on Xbox Live and we just announced that we got 5 million members already. We feel really good about delivering on our commitments. For Microsoft Game Studios, I think we had a strong year. We went through a period there where we didn't release any titles because we really focused on the launch, but then we had the release of Viva Pinata, Gears of War and Blue Dragon in Japan... I mean, boy I'm really proud of those titles we released for Xbox 360. 2006 was also a great year because of all the great work we did to set up our portfolio moving forward. You look at a title like Crackdown... leading right all the way through to Mass Effect, Halo 3, Project Gotham Racing 4, Lost Odyssey and so on and so forth, we feel really good about all of that. So I think I'd give us a B+. I think we've established a real firm position of leadership in the next-gen race, but we know we have a lot more work to do.

So in terms of the improvements that are necessary, what's keeping the B+ from being an A? What do you need to work on?

For us, we're pretty harsh critics of ourselves, so to earn an A we need to execute fully across the entire program, so it's not just MGS. We will try to do our part by delivering those AAA titles that really make an impact and differentiate our platform from an exclusive content standpoint. I think there's work we can do throughout the platform program in terms of addressing things that customers are telling us that they want. Making the entire platform more approachable to a broader audience, I think that's big opportunity for us, particularly now as we start to get into the third year of the console generation as well. So those are the kinds of things that I'd like to see use execute; it's part of executing the long-term strategy and I think that's what's going to be required to earn an A grade.

At E3 I asked you if you thought Gears of War would be the big holiday blockbuster title for MS and you said "yes." Are you surprised by how successful it turned out to be though?

No, I'm not surprised, and not only because I've been in the industry long enough to sense when you've got something that has mega-hit potential on your hands. It doesn't come along very often, and we're fortunate because we've had enough experience with picking Age of Empires even in the Windows gaming world or, of course, with Halo. So when that title debuts and it's getting incredible acclaim and attention at E3 in 2005, you're really onto something there because the Xbox 360 hasn't even released at that point in time and the anticipation for that kind of title is starting to build from that point, so it's launching from a much higher point than most new intellectual property would. Epic has a great pedigree, but still, this wasn't Unreal; this was Gears of War and nobody had ever heard of it. We have the advantage of being able to watch the development over time so by E3, we have a pretty good feeling that the game is going to deliver on that potential, because you have to remember, up until that point, it had been going on mainly graphical appeal, but we knew that there was a lot of great gameplay innovation there that people were going to get super excited about. So I'm not surprised, but it is hard work to make all of that come together and actually deliver on all of that potential.

So since you have this sense of...

Sixth sense, yeah.

[laughs] ...sense of what can be really successful out there, aside from Halo 3, what in your mind is going to be the next blockbuster title from Microsoft Game Studios?

We have very high hopes for Mass Effect, and again, Mass Effect is another one of those titles that when it debuted and people really got to take a closer look at it at last year's E3... it's helped by BioWare's pedigree, but gets to launch from a much higher standpoint and gets to just climb from there. So Mass Effect is clearly a title that we're super excited about. After that the next really big thing, you look at Lost Odyssey from Sakaguchi-san in Japan... he's the creator of Final Fantasy and he's very motivated to take that genre to another level and our people have been over in Japan with our studio over there spending a lot of time with it and they say it just looks amazing, so we're pretty excited about that in terms of big impactful titles where we know there are big audiences for them.

I hear that deals often get done at DICE, so is MGS looking to make any important deals here?

We have business involvement people here and it is and important venue for game people to talk to each other, like general managers meeting in baseball at the winter meetings, but I would tell you for us it's not a place where a lot of big deals get done. I mean, it is important for us to stay in touch with the development community, make sure we're hearing about the great ideas and where the great talent is and so forth. We've worked really hard at improving our reputation and our relationship with the best game developers in the world. It can't all boil down to this one event, that's a year-round effort that our biz dev guys are doing, so it's just one date on the calendar as far as we're concerned.

Is MGS considering further studio acquisitions to strengthen first-party development?

I'd love to tell you about that. [laughs] Truly, we don't have a strategy that says that we have to go out and acquire a bunch of studios. In fact, if you look at our portfolio, probably about three-quarters of our titles, across Windows and Xbox 360, and done with external studio partners. There's no algorithm that says there's got to be a certain percentage of either. For us, each situation where we've acquired a developer, or frankly divested, has been a case by case thing. A lot of it's based on the motivation of the developer as well, not just what Microsoft Game Studios wants because there's definitely developers out there, and I think Peter Molyneux at Lionhead was a good example where he said, "Look, managing an independent game developer is tough. Very, very tough. And I would rather focus on Fable 2 and all the great ideas that I have." And he wanted to find a more stable home, if you will, and we had a great partnership developed over Fable. There are other developers though, that are fiercely independent and would never, ever consider being acquired by Microsoft and Microsoft Game Studios. So it really is a case by case thing. Acquiring a developer doesn't necessarily always lead to fixing all of your issues. You've still got to manage that relationship, etc, etc. To me it's not a huge in terms of thinking about, "Gosh, we've got to own more internal studios."

One example I had in mind for you guys would be something like Bethesda, because obviously Oblivion is a fantastic game and has done very well on both PC and Xbox 360. Now, it's coming to PlayStation 3 and if you guys owned them and brought them into the Microsoft Game Studios fold, that would not happen in future Elder Scrolls titles. You'd be the exclusive home of those games, which are fantastic.

Sure they are; we have a ton of respect for those guys and we were fortunate because we did get to have exclusivity periods on our platforms. I think there are reasons why that happen anyway, because I think a lot of developers prefer our platforms in a lot of respects, but you're right, for a lot of third-party developers and publishers, the economics of the business almost say you've got to support multiple platforms. That is an evaluation we would go through and think about, if we could ensure that titles and developers were exclusive to our platform by acquisition. That's part of the calculus, but again, when you're talking about acquisition, you're talking about a pretty major commitment and it changes the nature of the management challenge pretty significantly, from managing as a third party, or even managing as an external development partner. In theory, we could go to a developer and say, "Look, we love what you do, we'd love to figure out a way to work together in the future" and that doesn't mean we have to acquire them.

It's interesting that you mention exclusivity; I've actually heard from a few people that they like the platform so much that they've actually been coming to you and Microsoft actually hasn't had to pay an exorbitant amount to get the exclusive rights because they're so enthusiastic. I don't know if you have anything to add about that...

First off, I do think you'll actually see fewer third-party exclusives in the future just because I do think the economics of the business are so challenging. That said, I do think we've done a really good job of starting to build a preference. We do it in a number of different ways. I think we have a competitive advantage when it comes to our relationships with third parties. I think we have a great third-party account team that does a great job of showing those guys a lot of TLC. We have a great game developer sport organization that's all about helping our third-party partners do the best work possible on our platforms as well, and again I think that feeds into it. I think that our platforms themselves offer the best canvas for their creators to develop and create the very best entertainment experiences possible. So I think all of those things accrue benefits to us as a platform, so it's not surprising that people would [look to us] where in the past, because of installed base differences and things like that, we would have to pay a lot to secure a third-party exclusive. It's not my business, but that's probably the way it would work. Going forward, it wouldn't surprise me at all if that equation changed quite a bit, and it's nice to be in that position.

In the past, Phil Harrison has said something about how Sony has the best first-party development and obviously Nintendo has some very popular IPs. So how do you think your first-party games stack up against the competition's, which obviously has some real incredible portfolios?

My most important job is to make sure Microsoft Game Studios has a competitive advantage as a first-party versus Sony's first-party. That is my number one job, and we will gladly go head-to-head with Sony's first party with our portfolio, with our titles, with our performance and I think we're going to make a huge difference in winning this generation. Again, it goes back to our objective as a company; our objective is to win this generation and we recognized a long time ago that the third-party environment is changing because you're not going to see as many third-party exclusives and in the past most of those benefits have actually gone to Sony through installed base etc, etc. That's changing now going forward so if the third-party playing field is basically neutral, which I could honestly look at and go "it's neutral," it's going to be up to the first parties to differentiate the platforms from a content standpoint. That's what we've been totally focused on the past three to four years and I think you're starting to see the fruits of that. Gears of War is a great example of that. We have a ton of respect for independent developers that are out there that work with Sony, but when it comes to going head-to-head with them as a publisher, we welcome that conversation.

At E3 I also asked you about Viva Pinata and Microsoft's efforts to reach out to a younger audience. Is there any evidence that's working?

I think we've got some evidence but today, to be honest, is primarily anecdotal in a lot of ways. One thing that you could point to is the television series and it's actually been a pretty popular series for the 4Kids folks and it's resonating very well with the target audience, particularly boys ages six to eleven. So I feel really good about the property and how it's appealing to people. With respect to the game itself, I think you have two things you have to look at, like it's just got a ton of critical acclaim and that's just the most important thing is a great game, so when people really plug into it when they get their 360s and they know, families know this is a great option in addition to Gears of War and Project Gotham Racing and so forth. This is a great option for their kids. Most of it's anecdotal; you've talked to the people who have bought Viva Pinata, shared it with their kids, and you've got level 60 gardeners, kids that just can't put it down even with a lot of great license alternatives that are out there, whether its Cars or Lego Star Wars and things like that. So that's where I know that we're onto something there; we've just got to get it into more people's hands.

Besides Viva Pinata, what else is MS doing to reach a younger and broader audience? Right now it still seems like the Xbox 360 is very much a hardcore gamer's machine...


...and the mainstream casual types and the broader audience are less interested in the system.

First of all, one of the things we have to do is get better at telling a story. We actually have, I believe, a lot of great assets that would make the Xbox 360 much more appealing to a broad audience. Just to pick some examples here, you've got the camera with video chat on Xbox Live. That's actually a great thing for families and friends to stay connected, even if it's not the primary use of the Xbox 360. Xbox Live Arcade: lot of great content there that can appeal to a broader audience. We've got the Core SKU, which is a lower priced option for people that don't want to spend $399 for the Xbox 360 SKU. But when you have a mega-hit like Gears of War, that continues to promote the perception that Xbox 360 is a hardcore platform, so I think we have to get better at telling the story. There is definitely work, and it goes back to my B+ rating as well, across the entire program to make the entire experience much more accessible. I don't think it's just a matter of content because there's actually a lot of "E" rated content available on Xbox 360. So I don't think it's just a matter of content – we need to do more there. But third parties are supporting us with games like Cars, all of the licensed content from THQ, Activision and EA and so forth coming to Xbox 360 for the most part. We've got to make it easier to get the out of box experience, we've got to make it easier to get onto Live if that's what you want to do and really make sure that customer segment that Nintendo's probably doing the best with right now, realizes that Xbox 360 is a super value proposition for them, but maybe they're scared off today because Xbox 360 tends to have a hardcore perception.

Why do so many Xbox 360s keep on breaking down? One of the GameDaily editors has gone through 4 replacements, I've gone through one, and we see many similar reports online. Is there a quality control problem?

360 is certainly a complex piece of consumer electronics, there's no question about that. It's not my area, so I can't speak to everything that goes into it, but definitely it's very, very complex, definitely more complex than the original Xbox. And so I think you're seeing issues at a rate reflects that particular aspect. What we have to do, and I can tell you this is an intense focus within the company, is to make sure we're rooting out the causes of all those issues so that we're not going to see those things in the future. Then for customers that are experiencing the problems—and those problems have existed—making sure that they have a really good customer service experience,t hat we're getting them replacements as quickly as possible and making that as painless as possible. It goes back to the B+ grade; I think that we have work to do there and it's widely understood and is being intensely focused on.

My main point is that, understanding the fact that it is a complex machine with many components, the bottom line for the consumer is that when they pay $300 or $400 they expect it to work.

Sure, I understand that completely and we do understand that. The intensity of the focus is really very, very high there.

PR Rep: We've also extended our warranty to one year.

That's a great point too. I think that was an important step for us, certainly not an insignificant cost to us to extend our warranty in the U.S. to a full year.

Arguably that should have been there from day one.

Maybe so... I'm not arguing or disputing that, but to go from 90 days to a full year incurs a lot of costs for doing that, but it's the right thing to do for customers. I think we've got to try and protect customers as much as possible, people who've put their faith in us, who are spending that kind of money with us, and that we also have to make sure we're very focused from an engineering standpoint in terms of addressing any issues that we might have, and at the same time that's why we're trying to add additional capabilities to the hardware and to the services.

Nintendo had a very successful holiday with a great start for the Wii, and that had to have taken away some sales from the 360. Are you worried about all the positive buzz for Nintendo possibly stealing market share or even just mind share from MS?

I'm not worried about it. I think you have to acknowledge that they've done a great job and anybody who's been around for a long time is always going to have a soft spot in their heart for Nintendo. I mean, most gamers grew up with Nintendo so I think a lot of people are pulling for Nintendo to be successful in their own right. And certainly they've done a really great job with the DS business and Wii has resonated with a segment of the audience we're interested in, we care a lot about, because in order to reach our aspirations we've got to win with that audience as well. So, I'm not worried about it; I'm also not surprised by it and I think we have to do a better job appealing to that same customer segment. We should all recognize that there's just some competitive advantages that Nintendo has that with that audience. I know Wii is a next-gen console for Nintendo, but whether or not it's a true next-gen competitor in the console space is a different question. And again, I think we can really craft a great value offering to customers that today are gravitating towards either Wii or, frankly, even PS2 today. If I were Sony, I'd be a little bit more worried that PS2 continues to sell so well while you can find the PS3s in stores.

It's funny because you mention PS2 selling well and that they should be worried doing so well while the PS3 is off to, some would say, a slow start. But on the other hand they say that you guys should be worried because the PS2 has been outselling the 360. How do you respond to that?

I think frankly that's a ridiculous comparison. I've seen that many times from Sony execs and I think that's ridiculous. I mean, it's $129! I mean, if that's how you want to compete, fine. [snickers] What matters is that we outsold Wii and PS3 combined in December. That's what matters. We dramatically outsold PS3 head-to-head and when you compare our first party portfolios and what our prospects are going forward, I mean Xbox Live over PlayStation Network etc, etc... that's the more important comparison. I mean, yeah, if we sold Xbox 360 for $129 and they outsold us with PS2s, then I'd be a little bit more worried.

Looking at Sony, are you surprised that so many people, even mainstream press, have turned on Sony and been so negative about the PS3 right out of the gate?

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