Microsoft's entertainment CFO does a 360

Bryan Lee sets the record straight on next-gen console shipments, dodges questions about "Halo 3" and sizes up the competition.

Ever since the Xbox 360 went on sale on Nov. 22 of last year, it has been in scant supply in the U.S. At stores where the console could be found, long lines formed and occasional scuffles broke out.

According to a leaked internal memo, top U.S. game retailer GameStop still hasn't fulfilled all its preorders and predicts it won't until the end of February--at the earliest.

Microsoft has conceded that there are supply issues with the console, and still maintains that the shortages are primarily due to the massive demand that accompanies any console launch. That assertion is partially backed up by the company's earnings report last week, which trumpeted the fact that 1.5 million Xboxes have been sold worldwide in the days since it launched. It's a respectable number, but still short of Microsoft's sales target, which predicted 2.75 million to 3 million units sold during its first 90 days on the market.

However, big sales figures come as cold comfort to Xbox fans still unable to find the 360 on store shelves. The main questions on their minds are: "When do I get to enter the 'HD era'?" "Will I someday be able to get an unbundled Xbox 360?" and "When the heck is 'Halo 3' actually coming out?"

We've known for years that the demand was going to be greater than the supply at this point in time.

GameSpot spoke with Bryan Lee, who was this week named CFO of Microsoft's overall Entertainment and Devices division. The amiable executive, who has also been CFO of the Home and Entertainment unit, one of seven Microsoft business groups, was more than happy to discuss sales, as well as the 2006 Xbox 360 game lineup, rumors of a Microsoft portable, and what his company has in store when the Nintendo Revoution and PlayStation 3 launch later this year.

Q: So you guys said that you shipped 1.5 million Xboxes so far?
Lee: Sold. Sold.

I've got kind of a mixed picture whether that's in line with your projections.
Lee: Yeah, we didn't break out any projections for the quarter. If you recall, we actually said the quarter was kind of a weird number to measure against. That's why we gave the 90-day number instead.

It's basically in line. Yeah, I mean the overarching thing here is the demand was so great, and we would have liked to have had a few more.

Well, you guys conceded that there are actually supply issues with the Xbox 360. What exactly is behind them?
Lee: Well, it's difficult to build this kind of cutting-edge technology, but the real reason there's so few available is demand is just so phenomenally high.

Oh, I know, absolutely.
Lee: I said it that way because I want to make sure it's in the right context. If we missed anything about what we would have liked to have built, we're talking really small numbers. We've known for years that the demand was going to be greater than the supply at this point in time. That was further amplified by our strategic decision to go in day and date around the world. We thought it was the right thing to do for our worldwide consumers. We thought it was the right thing to do for our shareholders. And after the launch, we still feel exactly the same, if not more so.

Nintendo in a lot of ways--unless something changes--we're moving farther and farther from being competitors.

So, if you split the difference between supply and demand, demand was always going to be big and supply was a little bit less than we thought. That's the way to think about it. We are slightly missing the quantity. We still think we'll actually sell over $1.5 billion over the entire Xbox world, $1.5 billion dollars, which is an enormous number for 90 days of a consumer product. But like we said, instead of seeing 2.75 million to 3 million consoles, we believe the number will be 2.5 (million). That is a little bit less than we thought. My gosh, we wish we'd had a few hundred thousand more.

Is it a chip issue that's holding up supply?
Lee: No. It's anticlimactic in that it's just a collection of the stuff being really hard to do. Another way to think about it is a few hundred thousand units is a couple of weeks' worth of manufacturing, give or take. So, that's the magnitude of the challenge that we face is how to make up a couple of weeks' worth of production.

In its earnings announcement, Microsoft said that the 360 has been actually the key driver for the quarter. You said it's boosted the home entertainment sector 13 percent or whatever.
Lee: Yeah.

Once you see the supply actually meeting demand, do you see that number rising further or not?
Lee: Well, one of the things, the 13 is a little bit of a false number in that it's a year-over-year quarter comparison. And if you actually remember, this time last year we had this little title called "Halo 2" which came out...

Never heard of it.
Lee: So, a different way to think about it is the fact that we think that for the year, the home and entertainment revenues will grow between 35 and 45 percent. And that's substantially driven by the Xbox 360 business.

Do you expect that number to rise later this year when "Halo 3" comes out?
Lee: Good try!

Seriously, though, do you guys have a time frame as to when it might come out? A release window?
Lee: We saved it for this call. We are ready to announce it for the first time right now.

Lee: Are you ready?

Lee: You got the exclusive.

Let me guess: It's ready when it's done.
Lee: We'll launch it when it's ready. No, we haven't said anything more about that.

So the whole parrying-the-PlayStation-3-launch thing is not happening?
Lee: I didn't say that. Just didn't say we were saying today what we're doing with it.

I don't know if you read the latest issue of BusinessWeek, but there is a quote regarding the possibility that Microsoft is considering its own handheld product to compete against the PSP and the DS.
Lee: It's just purely speculative.

A forecast from UBS analyst Michael Wallace said that you guys were going to be on target to ship 4.5 million Xbox 360s this year. Could you corroborate this?
Lee: I didn't see Mike's (forecast), but from our earnings call, we actually reconfirmed our estimate, or our projection that for our fiscal year ended June 30, we will have aggregate sales of between 4.5 million and 5.5 million. We sold 1.5 million already.

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