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...

Yeah.

...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?

No I'm not surprised, because I actually think they've caused most of it for themselves. One thing that we've tried to do very carefully at Microsoft and Microsoft Game Studios is make commitments that we're going to live up to. You can go back to history there see there's been a series of promises and announcements that have not come to fruition at all, and eventually customers are going to get a little tired of that. So I'm not surprised by it and of course people are not happy with the price point of the PlayStation 3 and we talked about it I think at E3 even where we said, "Look, I understand why Blu-ray is good for Sony by I don't understand why it's good for customers." Basically, Sony's asking - or making - every customer of PlayStation 3 support their Blu-ray ambitions. Hey, if I'm a customer, I'm not necessarily sure I'm signed up for that format, let alone that I want to pay a couple hundred dollars for the privilege of that.

If you had to make a prediction, do you think that Sony will cut the price on PS3 this year?

[pause] I don't want to make a prediction because I think that's a hard thing to predict. It's tied up into the overall Sony corporation economics and whether or not they have the ability and wherewithal to do that in the games business depending on the performance of their other businesses. We do understand very well that from a hardware cost perspective that would be extremely painful for them because there's no question that the PlayStation 3 is a very expensive piece of consumer electronics because of the choices that they've made with Blu-ray and Cell and so forth. Logically, I would be very surprised if they cut the price, but if Sony starts to worry about the prospects of PlayStation 3, particularly as we're going to deliver Mass Effect, Project Gotham Racing 4, Halo 3, Lost Odyssey and so on this year... I mean who knows what sort of desperate acts you might see.

Hypothetically speaking, if Sony lowered the price, do you think that Microsoft would try and take away their thunder with a price cut on the 360?

I don't think it's something that we would necessarily react to. First of all, you don't know necessarily what the magnitude of their price cut would be. I mean, there's a $200 difference today. Are we talking about a $100 price cut? Are we talking about $200 price cut or more? I think that's one of the factors that you obviously would have to look at. The other factor is we have a great deal of confidence frankly about what we offer to customers today, and even if we had price parity with PlayStation 3, I think we'd feel pretty good about the competitive situation head-to-head there in terms of the entire program, because it's not just the cost of the hardware as you know.

Can you name a few things about Nintendo and Sony that they may have done a better job at than MS and a few things where perhaps they could improve and learn from MS?

[long pause] Uh, lets see... [laughs]

Bit of a loaded question.

I'll tell you what, let me start with Nintendo, that's a little bit easier. I think Nintendo's done a fantastic job staying true to themselves. Again I said this back at E3; I applaud Nintendo on what they're trying to do in terms of trying to expand the audience. I think Nintendo's really smart. They've got a fantastic DS business and they've got the Wii now for a segment of the audience that they can pretty much own for a little while here, and I think you saw a lot of that success and popularity at the holidays. So I commend them, actually, for staying true to that, and they've been completely consistent about that. They're not high-definition, they're not about creating the world's leading online gaming service etc, etc. So they're really not trying to come up and say, "Gosh, we're a head to head choice with Sony or Microsoft."

With respect to Sony... [long pause] Gosh, I'm not sure what I'm going to say to be honest! I'm not trying to be rude about them. I mean, I feel really good about our strategy with respect to what we're doing with the Xbox 360. I think they have some pretty massive challenges on their hands. When they chose to go into the handheld business with the PSP and to compete directly with Nintendo in that space, I think that was a major, major thing to bite off. That's why we've resisted going into the handheld business because it's launching another platform and competing completely in another business that has very little synergy with the console business. So you have to treat it as a business unto its own. So, I'm just happy to see Sony and Nintendo beat each other up in the handheld business. Nintendo can beat up Sony in Japan maybe a little bit more effectively then we can right now, and really take it to Sony in terms of the next-gen console fight.

So there's nothing you can think of where, perhaps, you think Sony has done a little bit of a better job in some aspect of the business?

I'm sure I can think of something, but my competitiveness prevents me from saying anything. [laughs]

There have been a number of rumors out there about Microsoft possibly introducing revamped 360 hardware. Is MS going to issue updated 360 hardware with HDMI, a bigger HDD, quieter DVD drive or other features?

Nothing to announce yet today, but what I will say is that we're always look at how we can improve the entire experience, whether it's in the hardware or in the services and software itself. I think it's a lot easier to address the hardware changes that customers would want and that we would want as well than it is to actually deliver the software and service innovations that we have, particularly on Xbox Live. So I look at that as saying, "Of course we're going to listen to customers." When we launched Xbox Live Video Marketplace last year, which I think was a great innovation, it's been super successful and very popular for us on Xbox Live. Of course, customers are saying, "Hey, it'd be nice if we had a larger hard drive with all of this content that we've already been downloading on top of Video Marketplace and now you're adding to it." So that's just one example of where, "Ok, gosh we've heard that people would like a larger hard drive and things like that." Those are things that we're always looking at, and like I said, that stuff is much easier to add to than to think about all of the software innovations that our competitors would have to do to be comparable to what we do.

It's easier to add on the one hand, but if you decide to implement new hardware, new features... what does that do to the ten million or so people that already have the system?

With any kind of hardware SKU transition like that, those are the kind of issues that you have to mange through and it's not just customers, it's also retailers that have inventories of existing systems and things like that. You just have to work with those people really closely on working through those issues. There are a lot of different ways to make sure that transition goes well for customers and some of it may be that... and I'm just making this stuff up, but some of these new features might start coming at a higher price point. Some of it also is just the inevitability of the evolution of technology and hardware as well. I mean, I bought a PC a year ago and now I'm starting to wish I had more RAM, a faster CPU, so I think there is some inevitability there as well. What we have to do is we have to respect that if we do add greater capabilities from a hardware standpoint that we also manage that transition well from a software standpoint, and that we make sure that, even if you've got an "older Xbox 360" that all of that stuff interoperates well and that's where I think we have an advantage as a software company.

We hear that Gears has actually been selling ok in Japan. Do you think MS might finally be making a little progress over there?

Well I think that we're making a lot of progress in Japan and I think our aspirations there are realistic, but with Blue Dragon and Gears of War, they're both platinum titles with Weekly Famitsu, which is awesome for us. That hasn't happened for us before, not even Halo 2 reached that level, so to actually be creating titles that really resonate with Japanese consumers is very gratifying. And when Gears of War debuted, it was in the top 10 across all platforms. So we are proud of the fact that we're delivering content that is selling well. Blue Dragon has an insane attach rate for Xbox 360 customers over there and we just need to sell more Xbox 360s there. We've always said this is going to be a long road to hoe because we have to show, particularly Japanese developers and publishers, that Xbox 360 is a viable platform in Japan. I think a lot of those developers and publishers are recognizing if they want to have a successful global business, they have to look at Xbox 360 as a platform, because it's going to be the leader in the next-generation in the West. We firmly believe that, and Japan's not a big enough market just to support publishing your titles on one console. So I don't think they're immune to the same kind of pressures that an American publisher or a European publisher is subject to.

I found it a little odd that Peter Moore recently labeled the introduction of Vista, before it even shipped, as a 'PC gaming renaissance.' Doesn't it take some time to build up a renaissance? What makes Vista so special for PC gamers that they'll want to switch?

I'll tell you, I think it's not as much about Vista everything that the company has been doing. Remember, a year ago here at DICE, Peter gave a keynote address and it was all about Windows gaming. It basically said, "Look, we as a company has taken our eye off the ball of Windows gaming and we're going to fix that on a variety of levels." One certainly being what we deliver in the operating system itself, whether we're talking about the Games Explorer Parental Controls or DX 10 or Live coming to Windows. I mean, those are all innovations that we're bringing to Windows that weren't there. But it's also a lot of the work that we're doing with third-party publishers, getting them re-energized for Windows gaming. What we're really doing at retail, which is a huge thing in terms of making sure that we merchandise Windows gaming titles the same way that console titles are merchandised as opposed to the free-for-all where hopefully you can find the title you're looking for or something that interests you. Finally what we're trying to doing with MGS, with titles like Shadowrun and Halo 2 for Vista, where those titles really have to showcase what Windows gaming can be all about. Shadowrun of course being a great online multiplayer showcase for Live, being able to play cross-platform there. Halo 2 for Vista is just going to be a great showcase for Live on Windows and also for Vista gaming itself.

As for DirectX 10, John Carmack said that MS artificially created a need for Vista by tying it exclusively to the OS. What's your response to that?

John's entitled to his opinions; he's certainly earned the right to offer his opinions on that. We obviously disagree. There are a lot of innovations, improvements and enhancements in Vista. We haven't had a major release of Windows in five years! There are a lot of improvements in Windows Vista; they may not be as obvious as something like DX 10, but they're great reasons for why customers want to upgrade to Windows Vista, because DX 10 is not going to matter to 100% of the customers of Windows Vista either. So there are lots of features, whether it's just specifically gaming oriented or just general productivity or other consumer applications why people should upgrade to Windows Vista. So I respectfully disagree.

I got a press release when I checked my email this morning that Greg Canessa has moved on to PopCap, so he's no longer in charge of Xbox Live Arcade. What are your thoughts on his leaving and what's the future of Xbox Live Arcade?

First of all, we wish Greg a lot of luck at PopCap. It's a great company, it's been a partner for us in a variety of fronts, not just in Xbox Live Arcade, but in MSN Games as well, so they're certainly one of the leaders in that particular space and Greg has a great opportunity there, so he goes with our blessings and best wishes. That said, Xbox Live Arcade will survive the departure of Greg Canessa. He's done an amazing job of leading that group and leading that charge and certainly is responsible for a lot of that success and should feel good about that, but [pause] it's never about one person. I think what we've done there is built a great business and organization that clearly resonates with a lot of people; customers as well as game developers alike. So Arcade's going to be just fine.

Last question, Doug Lowenstein gave a very passionate keynote just a few hours back and was saying that the industry needs to take risks. He pointed to Nintendo's Wii and Will Wright's Spore, things like that, and said the industry really needs to push the medium forward and needs to take risks; it can't be averse to these kinds of things. So, from your perspective, what is Microsoft doing in gaming to push things forward and what would you point to as a risk that you have a lot of hope for?

Did Doug call out Viva Pinata?

I don't think he did.

He should have, because that's definitely a risk in my opinion. I'll answer this question on a number of fronts, because it's a great question. First of all, I agree with him, completely. One of the major inhibiting factors for the industry is that we've become way too dependent on licenses and sequels. That's understandable in some sense since the cost of developing and marketing great titles is becoming pretty significant. So you see publishers, who are generally publicly traded, are risk averse to a certain extent. I understand that. I'm actually really proud of what we've done in Microsoft game studios because we have continued to invest in new intellectual property – whether it's Viva Pinata, Blue Dragon, Mass Effect, Gears of War. Gears of War now is an established mega hit but you have to remember when we signed that three years ago, it wasn't Unreal; it was something completely new and different. Lost Odyssey is new and we can go on and so forth. So we're fortunate in our role as a first-party publisher to be able to say, "Look, we need to innovate, we need to take chances, we need to build new intellectual property while also having great established franchises like Project Gotham Racing, Forza, Halo and Fable." Those are great, I love having franchises too, but you need to have a healthy mix.

Another thing that we're doing at MGS is, I believe for the future of the industry, if we really want to become mainstream, and Nintendo's taken a certain approach with Wii, but the approach I'm more interested in is how do we make it a mainstream form of entertainment and I think that's going to have to be about how do we marry great storytelling with interactivity. This is where our partnership with Peter Jackson is just a first step on that journey, and it is the first step on that journey, but I think it's going to have to come from people like him and us helping him figuring out how you marry interactivity with everything that he does, and hopefully that will become a beacon, a great shining example for other people who are interested. Not movie people who want to make videogames or not people who want to make videogames out of movies, but actually want to take this medium to the next level and really establish it as something that hundreds of millions of people enjoy, not just a core gaming audience.

Do you have any update on the status of the Peter Jackson project, when we might hear more?

Still going great, you will hear more over time. The first thing, as we said when we announced this at X06, is that Peter is working with Bungie on a Halo project, and that is absolutely what those guys are working on. The good news, and I just spoke with Peter last week, is he's super excited and energized about the project and so is Bungie, which is a good thing. And that's an example of where I think that collaboration can really create something that's so much greater than the sum of its parts.

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