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.

Tor Thorsen Special to CNET News
Tor is a freelance contributor to CNET Australia.
Tor Thorsen
10 min read
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.

The only number that seems to have been slightly off guidance was off by a couple of weeks' worth of manufacturing, and I guess the (analysts) are saying we're going to make it all up in the second half of the year. It's my job to worry, and I don't worry about this that much, because it just means that we're making it up and the momentum around the launch continues to be fantastic.

OK. Now...
Lee: I don't know if you had a chance--I'm sorry to interrupt--I don't know if you had a chance to focus on the game-attach data and some of those numbers.

I was going to say, I know there's a high game-attach rate, but critics have said that's only because that most 360 preorders were bundles. Do you expect that attach rate to continue once all 360 preorders are met and people can just buy the console unbundled off the shelves?
Lee: Well, early adopters just buy lots of games. It's not unusual to have bundles--the same kinds of things happen for every console at its launch. Maybe it's a little more this time--I don't really know. But it's not like that didn't happen when PS2 was launched or Xbox was launched or a bunch of things were launched.

Those guys (have) great appetites, and consumers who come in later, historically, don't have that same appetite. You'd expect the number to drop. But actually, once that number starts, it continues to grow over time because the existing install base continues to buy games and a new install base buys fresh games. So, you can see that number migrate, historically, from somewhere around a 3-ish at this point in time up to, call it 10-ish, plus or minus, by the end of a cycle. So, it's always an upwardly moving number quarter over quarter.

Toward the end of your financial year (ending June 30), which titles specifically do you expect to be your biggest sellers?
Lee: We're actually excited about "Fight Night" from EA. We're excited about "Elder Scrolls 4," "Oblivion" from Bethesda, "Ghost Recon" (Advanced Warfighter) from Ubisoft, "Dead Rising" from Capcom, and "Full Auto" from Sega. Those are just some of the titles that we think are going to be great through the kind of spring period.

What is the launch window for "Gears of War"?
Lee: We haven't said that yet. The guys will be making some big announcements when the time's right around how "Gears of War" will get to market. We expect to have 50 titles out through the end of the fiscal year.

Now, about the 2006 holiday season...Nintendo's basically said it's going to launch the Revolution around then, and analysts are saying that's also when Sony will launch the PlayStation 3. Do you have anything specifically planned to respond to those launches?
Lee: Well, if I did, I couldn't tell you because I'd be setting up our competitors. We have planning assumptions on when we think they'll launch. We'll see if they actually hit those dates or not. The odd thing about this, is Nintendo in a lot of ways--unless something changes--we're moving farther and farther from being competitors. That's not a disrespect statement toward them. It's just a strategy statement.

Do you basically feel like you're going after different markets?
Lee: I think that's generally right. We'll see. All the early indications are (the Revolution) is going to be a very nice little thing that's not based on the same kind of gamer experience that we're trying to push. No disrespect intended. It's just a different approach.

But if you consider the PS3 competition, it'll be interesting to see if they launch in the holiday and, if so, what kind of quantity they have. And in a world where they don't have much quantity--which I think is what most smart money would tell you--they'll have their own production challenges. They're going to sell everything they make because the number won't be that big.

In a weird way, all they're going to do is help us sell stuff, because they're going to drive consumers into stores who want to buy something and there's no PS3 there. And so they'll say, "Great. I'll take a 360." The reason I say that is we saw a lot of that happen around the Xbox 360 launch, where we created a lot of demand and had a certain quantity. It helped PS2 sales.

Well, parents go to the store and want to get their kids a game system, and when they couldn't find the 360, they'd just buy a PS2.
Lee: Probably.

Can we expect an Xbox price drop in the next 12 months?
Lee: I couldn't tell you if we were going to do that. But launch is not the kind of thing where you go head-to-head, because unless something changes, one party doesn't have the ability to meet demand anyway. The real meaty question is going to be what happens the following holiday when, assuming they launch, they'll be out of production constraints. We'll both be out of production constraints, we'll both be past those early demand guys, and then what do you do? That's when it gets juicy.

Absolutely. Which one of your first-party titles, the Microsoft Game Studio titles for 360, are you most happy with?
Lee: Well, we're actually happy with all three of them. We're happy with "Project Gotham 3"--it sold consistently well. We're happy with a lot of the innovation in "Perfect Dark Zero" and really what it showcases on what the platform can do. And we're happy with "Kameo" and really how it showcases a broader appeal title in the platform. They're all wonderful titles, not just because they're our children. They're all kind of doing what they were strategically set out to do when we greenlit the titles years ago.

They're also all priced lower than third-party titles. Are you going to stick with that pricing strategy going forward, or are you going to raise first-party titles to the same level as third-party titles, which cost $59.99?
Lee: We make our pricing decisions title by title, country by country. For these titles, being the platform-holder gives you certain benefits and it gives you certain responsibilities. We chose these titles based on what we thought was right in the market, plus our position as the platform-holder. So I can't really tell you case by case what we'll do in the future. A lot of our goals are not around just driving profitability per title, like a lot of our partners might seek. Now the classic example would have been "Halo 2" where we could have charged...

...$100 and your firstborn, and people would have still bought it.
Lee: Yeah.

In regards to the dual SKU program that you guys have going, the core system and the Xbox 360 system proper, do you have plans to continue that or are you going to eventually just offer a single system with the HDD?
Lee: We're not changing our SKU approach--we think customer choice is fantastic. Nothing about the holiday sales changed any of that, it really reconfirmed it. We suspected that the holiday sales would skew very heavily toward the full Xbox 360, and that's true. That makes sense given the audience that comes out initially. We think that's great and we're happy to give customers choice, like I said, and as a business guy, if my competitor chooses not to offer that choice, I'm even happier.

I think it makes our products much more appealing and we're very happy with our decision there.

In regards to the HD-DVD external drive you announced at CES, do have any plans of releasing a model with such a drive included internally into the actual unit?
Lee: We haven't made any other announcements.

I know that the HD-DVD drive was supposed to come out this year sometime. Do you have an actual time frame for that? Will it be ready for the holidays?
Lee: They'll be ready by Tuesday...No, I was just kidding. No we haven't said anything more than what you already know.  

Tor Thorsen reported for GameSpot.