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Building an empire, an Xbox at a time

Microsoft Vice President Peter Moore talks about how the company intends to bring a billion people into its gaming empire.

In mid-November, both Sony and Nintendo plan to release their next-generation game consoles, the PlayStation 3 and Wii, respectively.

But as the game world welcomes these new consoles--and the first round of games for them--Microsoft's Xbox 360 will be reaching its first birthday with a year's head-start in games and accessories. Further, while the Wii is getting a lot of good press for its $250 price tag, Sony's decision to put Blu-ray players in the PS3 and thus price its high-end console at $599 has resulted in a lot of criticism. Microsoft's "premium" Xbox costs $399.

Since the Xbox 360 launch last November in the Mojave Desert, Microsoft also has put a great deal of effort into bolstering its Xbox Live service and has recently unveiled its

At the same time, the company has been touting its Xbox Live Arcade service, through which the company is regularly releasing hit games of the past such as "Pac Man," "Galaga" and "Defender." Those games cost less than $10 to download and have become a hit on the service.

Throughout it all, Microsoft Vice President Peter Moore has presided over the growing Xbox 360 empire. The company has said it eventually intends for a billion people to be connected in some way to that empire. And although that goal may be a fantasy, it's not hard to imagine Microsoft doing all it can to try to get there.

CNET sat down recently with Moore at Microsoft's Xbox headquarters in Redmond, Wash., as Moore was preparing to head overseas for the Tokyo Game Show and then, among other things, a trip to India to launch the Xbox there.

Q: Why release the Xbox 360 in India?
Moore: It's an incredibly fascinating market. India's growing, finally getting a middle class that's of a proportion that you really feel you can grow some business with.

How much does Xbox cost in India?
Moore: Obviously, it's in rupees. It's probably the dollar equivalent of where we are today here. In some instances, we will price down a little bit for the marketplace, but it's a premium product. And as I mentioned earlier, there is a middle class there, and clearly we have to market to them. Not only do you want to market to the consumers that buy the console, we want to market to the consumer that can connect online. And broadband penetration is growing fast there. Plus, the business model is about selling software. The software pricing is where we could look at being a little more market conscious.

Given different costs of living, the price of an Xbox 360 is not the same in San Francisco and Topeka. How do you deal with that?
Moore: It's more expensive in Topeka. But we don't just look at the console cost in isolation. We look at what it takes to be up and running and have the best experience. We call it "TCO," total cost of ownership.

So the question is how you attract that next 20 million consumers when you need $199 as a price point for example, to do that.

You look at hardware cost itself, and then you look at what software costs, you look at game subscriptions and peripherals. It is something that companies like ourselves, Sony and Nintendo spend a lot of time figuring out. Where is the sweet spot? You're not going to make any money on the hardware in the early going.

When you look at an ideal Xbox consumer, who is that person?
Moore: He is a male. He is connected. He is very, very used to going online for community. He's probably played PC games online. He's part of a "Halo 2" clan and has been for two years. That comes from him playing "Halo" in college--so he's 23 or 24--with his buddies. He still loves to go out on a Wednesday night with them, even though they're spread all around the U.S. But they all come together Wednesday night to relive the days in the dorm room.

What else does he want?
Moore: He also expects instant gratification, the delivery of game demos to his hard drive via his broadband network. And he's popular enough to have his profile online and he's pretty competitive, so he loves (Xbox game) achievements. He'll stay up all night to get achievements in games that his buddies have because it just pisses him off that they've got them first. He also would rather starve to death than not have a high-definition TV. He'll go without food rather than have a standard-def 27-inch TV.

It's looking like the Wii won't be direct competition for the Xbox or PlayStation 3. Do you agree?
Moore: In a lot of instances, it will be a No. 2 box because it's priced accordingly. The fear I would have is that people will buy the box and only play a few games. I think you'll pull it out at parties. It's fun for a few minutes, but I'm not sure (how long that will last).

When Sony announced the PS3 will cost $600, were you guys pumping your fists?
Moore: It will still sell out at launch. I've never known a console that didn't blow the doors down in the early going, and PS3 and the Wii will be no exception. But this is not about the first six months. These are six- to eight-year cycles now. So the question is how you attract that next 20 million consumers when you need $199 as a price point, for example, to do that. But maybe your cost of goods programming has not reduced in line to where you need. We've lived through that.

So as a result, you may have to take an enormous financial hit to catch up to your competitors' pricing. Sony is very fond of saying, "We never come in to the market first, but we always win," or "The next generation will start when we say it starts." But they have none of the same advantages in this generation, like superior graphics, being the only console to play DVDs, or exclusive software. Now, these are two boxes on a par. And many would say the advantage goes to Microsoft because we're in the second generation of game development (while PS3 developers are still on the first generation).

What percentage of your market has high-definition sets?
Moore: Ninety percent of our first million customers in the U.S. either had one or said they were going to buy one within six months. The deeper you get in, the more that drops off, because price becomes a factor. And so I think we're doing a good job in tipping over that 25-year-old male into buying these things. They're actually more likely to buy them for video games because there's not much high-definition content available on TV.

What have you learned about launching consoles?
Moore: There's never enough supply. What we set out to do was do the first global launch. And it's Murphy's Law. A product that has 1,700 parts in it, it's no good if 1,699 parts show up. You can't manufacture it. But I will go to my grave proud of the fact that we managed to break the paradigm that it needs 12 months to launch a console. We did it in 17 days, from when we started here and then moved to Japan.

Can you talk about how Xbox fits into the larger Microsoft vision?
Moore: We have a real view of, in two simple words, connected entertainment. A lot of people have an offline entertainment experience, and we all do. But more and more--if you think about it--of our entertainment experiences are connected to a server where the content is. We're consuming it on high-definition televisions. We're editing, storing and manipulating it on our bigger PCs, particularly Media Center Edition PCs. Hard drives on those things now are 250GB, and we're seeing the ability for this simple portal to the home for entertainment being that PC.

It's where I keep my photos, where I keep 10,000 songs and my high-definition movies. I'll stream stuff, but I want to consume it at home, not on my crummy 15-inch laptop. The Xbox 360, which has Media Center extender software, allows you to be able to consume entertainment in the places where you should consume it. Now, Zune (Microsoft's forthcoming music player) becomes, over the next couple of years, the portable extension of that, because all of this needs to connect.

Tell me more about Vista and how it relates to video games?
Moore: We look at Vista as a huge opportunity to reinvigorate PC gaming. Vista is a games platform. It is the best games OS we've ever developed. It is truly plug and play, and that's why we lost a lot of gamers to the console, because PC games wouldn't load properly. We've done a tremendous amount of back-end work with Vista to make sure games load. Vista is built on DirectX 10, and the games will run on DirectX 10.

What can you say about "Halo 3?"
Moore: It's coming out in 2007. The game is going to be even a quantum leap from "Halo 2." We've allowed Bungie to really get this game to the next level, as "Halo 2" was from "Halo," "Halo 3" must be from "Halo 2." The multiplayer aspects of it must continue to redefine the way we play games.