From Startup to Exit
Welcome to the Startup to Exit podcast where we bring you world-class entrepreneurs and VCs to share their hard-earned success stories and secrets. This podcast has been brought to you by TiE Seattle. TiE is a global non-profit that focuses on fostering entrepreneurship. TiE Seattle offers a range of programs including the GoVertical Startup Creation Weekend, TiE Entrepreneur Institute, and the TiE Seattle Angel Network. We encourage you to become a TiE member so you can gain access to these great programs. To become a member, please visit www.Seattle.tie.org.
From Startup to Exit
Microsoft@50: Birth of Xbox, with Chief Xbox Officer, Robbie Bach
This is the 3rd installment of the Microsoft@50 series. We interview Robbie Bach, who was the Chief Xbox Officer at Microsoft and the founder of Xbox at Microsoft. Before founding Xbox, he ran Microsoft Office and made it into the standard it is today. After 22 years at Microsoft, Robbie announced his retirement from Microsoft effective in the fall of 2010. Robbie has spoken to corporate, academic, and civic groups across the country and in 2015 completed his first book, Xbox Revisited: A Game Plan for Corporate and Civic Renewal, followed by the Wikes Insurrection.
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Brought to you by TiE Seattle
Hosts: Shirish Nadkarni and Gowri Shankar
Producers: Minee Verma and Eesha Jain
YouTube Channel: https://www.youtube.com/@fromstartuptoexitpodcast
You know, how was Robbie able to write write two novels that are techno thrillers?
SPEAKER_01:Right.
SPEAKER_03:If you'd asked people on the Xbox team who's the least creative person on the team and the least likely to write an original novel, I would have been in the top of that list. Trust me. And yet, because I worked in a creative business for ten years. I learned a lot of that and found part of my brain that I didn't know I even had. And I think it's difficult for AI to replicate that.
SPEAKER_00:Welcome to the Startup to Exit podcast, where we will bring you world-class entrepreneurs and VCs to share their hard-earned success stories and secrets. This podcast has been brought to you by Thai Seattle. Thai is a global nonprofit that focuses on fostering entrepreneurship. Thai Seattle offers a range of programs, including the Go Vertical Startup Creation Weekend, Thai Entrepreneur Institute, and the Thai Seattle Angel Network. We encourage you to become a Thai member so you can gain access to these great programs. To become a member, please visit www.seattle.tai.org.
SPEAKER_05:Hello everybody. Welcome to another episode of our podcast from Startup to Exit. I'm here with my co-host Sharish Natkarni. My name is Gary Shankar. We both serve on the board of Thai Seattle, which produces this podcast. First of all, we both want to thank you for all the support that you've given us over the last year, where we have brought this podcast to all of you, and I hope all of you have enjoyed all the content that we are bringing from our guests. We are launching a very special series. We are launching a series that is very close to both our hearts because we are both Seattleites. Microsoft just turned 50. And as a tribute to the company and the impact it's had on the world and our city, we are going to talk to some of the very early executives who shaped and and grew the Microsoft brand to what it is today. I hope all of you enjoy it. We will be talking to many of them, and over over the time you will learn a lot of things about the early years of Microsoft. Thank you all and hope you enjoy it.
SPEAKER_04:Today is our third installment of our Microsoft at 50 series. We bring you Robbie Bach, who was the chief Xbox officer and the founder of Xbox at Microsoft. Before founding Xbox, he ran Microsoft Office and made it into a standard it is today. He's also an author of two books, and I believe he's uh on the way with his third uh book. Uh first one is called Xbox Revisited, and the second one is called Wilkes Insurrection. So I recommend you take a look at those books. Uh I've read the first one, uh highly recommend it. So welcome, uh Robbie.
SPEAKER_03:Thanks, Sharish. Before I get myself into trouble with my best friend Pete Higgins, I think he gets more credit for office than I do. I just get the marketing credit for office, not uh not starting the whole thing. I think John Devon, Chris Peters, and Pete might have take a little exception to that remark.
SPEAKER_04:So I'm sure you had a big big role to play. We'll we'll we'll talk more about it. Absolutely. That's great. So um let's start with your early career at uh Microsoft. Uh tell us when you started at Microsoft, uh, what made you join Microsoft, and then uh what did you do before becoming chief Xbox Officer?
SPEAKER_03:So uh I started Microsoft in August of 1988, and I came from business school. And I the reason I came to Microsoft really was the interview day. You know, I had this, as many of us did, this incredibly intense, like seven-hour-long interviews on one day. And everybody I talked to was very different, but all super smart, super intense, super focused. And I walked away exhausted and exhilarated at the same time. And uh, you know, I Brad Chase, Brad Chase took me out to dinner, which was supposed to be the relaxing time, and the dude interviewed me for an hour straight. I didn't give me anything to eat. He's a close friend. I still give him a hard time about that. Um, but that interview day was was amazing. So I I started in in August. Uh, I was assigned in marketing to the what was then called the entry business unit, not the best name ever created, but uh uh I was working at Microsoft Works, uh, did that for about 18 months, and then I went overseas to work at the European headquarters. I was the first US going overseas expat at the company.
SPEAKER_04:Um that's quite unusual. That's quite unusual. Not many people did that.
SPEAKER_03:Yeah, it was it was an awesome experience. I worked for Bernard Vernon there as his business manager. Um, you know, he's he was incredible, and that was just a really a career and life-changing experience. And then came back to be group product manager of Excel, then group product manager for office as we created office working with Mark Cruz and Hank Veehill. And then uh after office, I made sort of a shift and went to be a business uh unit leader and ran this thing called Learning and Entertainment, which was a collection of uh things from the old consumer division. Um that included our games business, which led to the formation of the Xbox team. And I led the Xbox team for five years, and then it worked for me for another five years. For the last uh five years I was at Microsoft. And in that last five years, I also ran some music work, some other entertainment uh assets as well as our mobile assets. And so I left Microsoft in 2010 to go on to do what is now mostly civic work plus my writing and and public speaking, and a bunch of board work.
SPEAKER_04:Yeah, yeah. So um uh which year was it that you uh joined uh uh Microsoft Office?
SPEAKER_03:Uh Office would have been 1992 when I came back from Europe. Okay, so at that time, yeah, go ahead. I was just gonna say Office existed on the Mac and had been on the Mac for like four years at that point. Yeah, yeah. And it there was a version of it that I guess loosely existed on Windows, but uh the real first version of that shipped uh in late 93, early 94. Uh was a great episode called Office Airbox, which we could talk about if you want. That's a very funny part of Office history.
SPEAKER_04:But yeah, please do, please do, yeah.
SPEAKER_03:Uh well, when when when Office became Office, um in the real sense, you know, there was three people on the Office development team, and you know, a bunch of people on Word and Excel and PowerPoint, and at that point Access hadn't shipped yet. And so this release that we were bringing them all together was like this shared menu structure with no shared code. So all the menus looked alike, there was no shared code. There was this call thing called the Microsoft Office Manager, which was an extra toolbar that helped you navigate between the apps, and that was going to be Microsoft Office. Well, unfortunately, Word shipped first, Excel shipped three months later, and PowerPoint was another five months after that. And, you know, we had this great conversation with Steve Ballmer. Mark Cruz and I were on a, believe it or not, a video teleconference call with Steve. He was in Europe, and he was really, I would say, energized, let's say that in a Steve Baller phrase, about the fact that Office was not shipping together. And so he just we we had this long discussion, this great video moment where because audio and video didn't sink at the time, Steve was expressing his emotion to us in audio. And then about 40 seconds later, we saw all the hand motions that went along with along with the audio. I'll never forget that meeting. Um we created this thing called Airbox, which when that version of Office shipped, which we ended up calling Office 4, when that version of Office shipped, it had word disks in it and coupons for Excel and PowerPoint.
SPEAKER_04:Yeah, makes sense, yeah.
SPEAKER_03:When we did uh we fulfilled Excel and PowerPoint when it shipped. So that was the airbox version of Office, which was the first version of Office we shipped together, and then we did Office 95 and Office 97 after that.
SPEAKER_04:So certainly at that time, uh Microsoft Office was not the market leader in productivity uh applications, right? So uh but you were, as I mentioned earlier, one of the key uh contributors along with others to make Microsoft Office into a standard exists today. So what were some of the uh key strategies in your mind that uh you followed to drive the market share leadership for office?
SPEAKER_03:Well, I think there's a couple of things. I mean, look, first of all, you got to give a lot of credit to the product teams. The word Excel teams going into that were really category focused. And they were, you know, Word was fighting WordPerfect, and Excel was fighting one, two, three. And those teams were organized and motivated around that. And Lewis Levin, John Devon, Chris Peters, uh, ultimately Steven Sanofsky, they helped shift the culture of those teams to actually focus on office. And that was probably a two to three year process, but it's really actually quite remarkable because I will tell you the Word and Excel team didn't even like each other when I joined the Excel team, right? I mean, they were arguing about the pixel height of the toolbar, right? I mean, they weren't, you know, they weren't actually working super closely together, but the leadership was. Those guys changed the culture of those groups. So the first thing is getting the product teams aligned on thinking about office as an entity, not as like a package. Um that's the first thing. Second thing that uh I will say worked in our favor in a in a big way was the realization that um desktop applications were becoming a corporate IT purchase, not a department-level purchase. Uh, you know, when I first joined Excel, you know, the the the guys you were talking to, you're thinking about, well, we got to get the finance department to buy Excel. And pretty soon IT directors had realized that there was all this application purchasing going on in their organization. They were getting no economic efficiencies. And by the way, supporting all the different apps that people were buying was a complete pain in the butt. So they started centralizing the buying. And when they did that, the fact that we had office with a leader in spreadsheets, arguably the leader in spreadsheets, and a leader in word processing, again, arguably the leader in word processing, meant they could buy one package from one company with one support system and one contract. And that was a huge problem for Lotus and WordPerfect because they just couldn't offer that. And so the sales team, you know, obviously played a dramatic role in making that happen. And then, you know, on the marketing side, we started talking about shared things. We really started showing demos where you could, you know, take something from Excel and drop it into Word. And we created this uh marketing to uh term called IntelliSense, which was the how we described all the things that the development teams were automating. Like suddenly the autosum button became IntelliSense technology, and background spell checking was IntelliSense technology. It's like it's like how they call everything AI today, right? Right, right, right, right, yeah. And so and you know, so you start to use those marketing tools to sort of make all of that happen. And having that leadership made a big difference. And then the final thing, you know, if you're a marketing person, you think about pricing, and you know, being able to price office at the same price that Word and Excel were selling for alone was kind of a was kind of a cool thing. So we took the upgrade pricing for Word and Excel. So if you're a WordPress user, the price you paid for upgrades to Word and the price you paid to upgrade from one to three to Excel, added those two up, and that's what it cost to get office. It was a good it was a great deal. Um so that whole combination, product stuff, sales stuff, marketing ideas kind of came together in a unique period of time. Last thing I'll say, the transition to GUI was a monstrous advantage for us. Because Louis and WordPerfect just couldn't decide to eat their uh character-based apps and didn't truly commit to graphical user interface.
SPEAKER_02:Right.
SPEAKER_03:And so the fact that we didn't care about we didn't we didn't have much market share in the character world anyway. So we could really commit to GUI, that made a huge difference.
SPEAKER_04:Right, right, got it. So uh from Office uh you went to the consumer division. Yeah, what what made you uh I mean Office was where the action was, so what made you decide to go to the consumer division?
SPEAKER_03:Well, in in 97, uh in early 97 we launched Office 97. And you know, honestly, it was the third version of Office I'd launched. I I felt like I wasn't learning a whole lot. Um I kind of felt like um if I'm honest, a little stale in my career. Um and I wanted to get beyond just being in marketing, I wanted to get in general management. And I I actually thought about leaving the company. This very funny story. I I I asked Pete Higgins for a meeting, and I I worked for Richard Fade, who worked for Pete, and but Pete and I were pretty close, and Richard knew that. So, you know, I went to talk to Pete and Richard about hey, you know, I'm thinking about leaving the company because I'm kind of feeling like I'm stalled. But of course, and I walk into that meeting in a completely separate exercise that honestly had more to do with other people than it did to me. They called the meeting to promote me to vice president. So we had this weird discussion where I was at a meeting to tell them I was thinking about leaving, and they were at a meeting to tell me that I'd just been promoted. Um, in the end, they uh Pete agreed that I should shift from marketing into a business management role. And he had just taken over the consumer division from Patty Stonecipher, and he had a role for people who for the products that were um in Carta, uh Magic School Bus, our kids' applications, and the PC gaming business. And so I went to run that not as the marketing person but as a business person. And that was a was kind of the perfect ship for me because I went from being on a big mothership where you know I wasn't really probably qualified to do the general management role to working on a smaller business where I could learn general management and learn to work with development teams and do all that kind of stuff, which was really awesome. It was it was the beauty of Microsoft at the time because you could advance in your career and learn at the same time. That was that was amazing.
SPEAKER_04:That's great. That's great. So let's talk about Xbox now. Um there's a whole story behind the uh how the idea came about uh from an off-site and so forth. Uh so tell us uh tell us more about it.
SPEAKER_03:Well, there's sort of two trails of the Xbox creation story, both of which are true and both of which are real. There's um there were groups of people uh who were um, some of whom were X3DO employees, some of whom were DirectX employees. There were some people from uh uh a couple of other consumer places that were kind of throwing around various ideas for Microsoft doing a game console. And they were doing this as what I would call a garage shop effort. Um and so uh those groups were sort of doing their work in the background, and they've been sort of lobbying to get some attention, etc. We then go to an executive staff retreat, and Rick and we had this thing called open spaces. I don't know if you remember this, Sharice or Gowry. We they did this thing at the executive staff retreat where you could propose a topic, and you would write it on a big piece of paper and throw it up on the wall. And then after all the topics were on the wall, people got to vote which topic they want to talk about. Then you went to that topic and went with those people to a room and did a breakout session. So Rick Thompson proposed a topic: should Microsoft do a video game console? Because he knew about all this garage shop work that was being done. And uh Bill had a topic that he proposed, and they decided to consolidate some topics, and his topic kind of went away. So he came with us. So we we literally went into like a hotel room, like there were two beds on a desk in there. And so everybody climbs into this room to discuss whether Microsoft should do a video game console. And uh Rick talked about the the work that was being done. Um Bill probably knew about some of it, um, but he asked a bunch of questions and came back saying, All right, I'm gonna dig in on this. Bring the product teams to me and I'll evaluate whether there's an idea. Three months passes on. In July, uh Steve calls Rick Thompson and I to a meeting, says, Bill thinks we have a product idea. He wants us to decide if there's a business to create. So Rick um goes off to work on that. And for six months, works on it, and then December 21st of 1999, we had a meeting with Bill and Steve and some other people, and they approved what was called Project Xbox because it was most of the technical ideas came from the DirectX side. They kind of won that battle on the technical side, and so most of the technical ideas came from the DirectX team, so it was Project Xbox. Interesting.
SPEAKER_04:So the idea of the X came from DirectX.
SPEAKER_03:Correct. Okay, go ahead. Correct. And by the way, to to your your your viewers, there's a great six-part docuseries on this that Microsoft put out on the whole Xbox experience, which, if you're interested in Xbox, is an awesome tour through Xbox land. Um and really talks in in much more detail about the things that I just described and sort of the intricacies of how those decisions got made. So the project gets approved uh in December of 1999. In uh February of 2000, Bill and Steve have sort of internalized what the team's actually going to do. Because Bill's view was this is Windows in a console. And so, you know, DirectX, Windows in a console, and you know, this is gonna run Windows games, and you know, and the team view was no, actually, that's not what we're gonna do. We're gonna build a video game console. And we'll use DirectX at the API level, but we're not gonna use a lot of Windows code except for maybe some some kernel code and some security code, and it's not gonna run anything from Windows. And so there was this meeting which afterwards we called the Valentine's Day Massacre on uh the 14th of February, where Bill and Steve and a bunch of other people we came together late one afternoon and yelled at each other for an hour and a half, two hours about what was right, what was wrong, what we should be doing. Bill was pissed, he thought we'd changed the idea. You know you you know these types of meetings, you know how they go. And of course, the meeting went way long, destroyed everybody's Valentine's Day plans. And, you know, at some point we just said, well, okay, fine, then we're not gonna do Windows on a console. So if that's what you really want us to do, we should do that. Um, but if you want us to do a uh a gaming console, we should pursue with our idea. And we had another 45-minute discussion about well, what does it mean not to do this? Because people were legitimately worried about Sony producing a console that was effectively a PC in the living room. In the living room, yeah. And uh at the end of that meeting, this great episode, Steve looks to Rick Beluso, who was my boss at the time. He looks to Rick Beluso and says, Rick, can these guys do this? If we approve this and let them go on the way they're going, do you think they can approve it? And Rick, of course, was a wonderful guy, great manager, not the perfect person for Microsoft. And Rick knew loosely what we were doing, but not really. But Rick's response was he turned to Steve without hesitation and said, Absolutely, they'll get it done. And Steve said, Okay, you guys have our support, we won't second guess you. That's great. And Steve and Bill, to their credit, were the two biggest supporters in the senior management team of that project. And without their support, it would have gotten killed at some point in the next two to three years. They were they were incredibly supportive and incredibly helpful.
SPEAKER_04:Bill was not a gamer himself, right? Uh he never did I I don't I don't get a sense that he was ever a gamer.
SPEAKER_03:No, he really wasn't. You know, in classic Bill fashion, he decided that because we were going to do Xbox, he needed to start playing some of the games. So he would ask us and we would send him games. And he would play them. And he was particularly interested in games that could broaden the audience. Like, you know, a really hardcore gaming thing. I don't think he felt like he could add much value to our discussion of you know whether Halo was a great game or not. But for some of the stuff we were doing for the casual consumer market, um, he gave us a lot of feedback. And obviously he gave us a ton of feedback about Xbox Live. Um, because that was something new. There's a whole bunch of technical complexity to that. I mean, he could really help with that. And he was also super involved in the silicon discussions we had about CPUs and GPUs uh and in all versions of Xbox, honestly.
SPEAKER_04:Got it. So um uh You know, at that time uh Sony and Nintendo were you know the dominant players, uh you know, at a whole stock of games supporting their platforms. Uh not an easy market to go into no by any station, but yeah. Uh so wha what was your strategy uh to win? You know, how are you gonna differentiate yourself?
SPEAKER_03:Well, what what so there's there's two sides to this sort of let me just say I and on the one hand, our strategy was ship the world's most powerful video game console in 18 months and make sure the explosions look great, right? So, you know, there's a certain part of this that was you know, classic Microsoft ego, we've never done this before, but we'll do it better than everybody else, and it'll be more powerful, so therefore it'll be better. So that's and uh at one level that was a huge problem for the team because we really weren't coalesced on a strategy. On the other hand, if you dig under the covers a little bit, in particular if you talk to somebody like Jay Allard or to uh to Ed Freeze, both of whom were were critical, and to Todd Holmdo, all three of which were critical to the success of this, we bet on a series of technologies that were just coming into the marketplace that were super important and turned out to be uh truly incredible bets. And you know, I I wasn't even I you know, it's classic, I'm the guy running the business. I wasn't smart enough to understand A how risky those bets were or how prescient they were in terms of the success. But go back to like 1999 and say, oh, we're gonna bet on broadband. You forget that in 1999 broadband didn't exist.
SPEAKER_04:Yeah, yeah, yeah. Uh missile dial up.
SPEAKER_03:And nobody was convinced that the cable companies or the telcos were ever gonna get it right. And yet in early 2000, we had a meeting with Bill and we told him we were taking the modem out of Xbox and just gonna ship with an Ethernet port.
SPEAKER_04:I mean, that's a that's a quite buzzy move.
SPEAKER_03:Yeah, it's a quick, uh very big move. So that's one thing we bet on, which was huge. And so Xbox Live um became this sort of seminal event in the gaming industry. I mean, if there's a thing that Xbox has given the gaming industry, there's Halo for sure, of course. But it's a different world of online gaming.
SPEAKER_04:So wasn't that wasn't the vision to have multiplayer games?
SPEAKER_03:Uh well, so the first part is you bet on broadband so you can actually do really good multiplayer games. So that's the first part of the bet. So that's broadband, and then there's online gaming generally, which is okay, we're gonna bet on an experience that's different than any online gaming experience. You could play online at the time, but well, good luck finding the IP address of the guy you were trying to play. And by the way, if you found him once in one game, you had to find him some other way in another game. There was no I concept of unified identity or any of those kinds of things. And so Xbox Live created the first social network, right? This is must have been long before uh before Facebook, in fact, before MySpace. And this is in 2002. Um, you know, so that's a that's a giant innovation. And it was a subscription model. How many subscriptions did you have in 2002? Almost none. And and the subscriptions you had were to magazines. So, you know, add up now. I probably have 40. And and so a subscription model with unified identification, with a great way to find people, a way to communicate with people, a network, uh, was incredibly powerful. Um, and so that was um, you know, a big giant bet. And then the the third bet was the product Halo, um, which without without which we would have never been successful. And Halo was not just a bet on an individual game, but in in 2001, when Halo shipped, first-person shooting games were not popular on gaming consoles. They were almost strictly associated with PCs because you have to be able to aim a gun and move a character at the same time, which meant people used a mouse and a keyboard. And so the Halo guys came up with this unique control mechanism that used a game controller to do both. And so betting on a first-person shooter, again, was one of these big bets. So you put all that together, and if you step back after the fact, you'd say, oh, our strategy was to differentiate with online gaming and to bet on broadband and to bet on a subscription service and first-person shooters. And we I never articulated it that way at the time. I will I will say maybe there are other people who are smarter than I was on the team who could have articulated it that way, but never really thought about it that way. But that's in fact what happened.
SPEAKER_04:That's great. That's great. All right, over to you, Gauri.
SPEAKER_05:Uh thanks, Shari. So, Robbie, let's go back a little bit, right? Uh so in 87, you choose Microsoft. You go through the interviews, and I'm sure there were other choices. Microsoft was a was one of the companies, but not the company, right? Uh there are there were other choices. So, coming out of business school, what attracted you to Microsoft at that point?
SPEAKER_03:Well, uh, like I said, the first thing that attracted me was just the intensity of the people. And not just their intensity, but their smarts. And people were super friendly. I mean, I liked all the people I interviewed with. But, you know, what one of my first interviews was with John Nielsen, you know, who was ultimately my he was my fifth manager, but my first manager in my first month. I had five managers in my first month at Microsoft. So John and I ultimately got to know each other quite well. My interview with him, we had one question in the interview. At the beginning of the interview, he asked me which is more important, sales or market. And we talked about that for an hour. And so I, you know, you just and and John, of course, you know, sad that he passed away so early, but was just a wonderful guy and was super friendly, super nice, but intense. And we had this great conversation. So ultimately, as is often the case, people was sort of a key factor in making that decision. Um, and you know, likewise, Jeff Rakes, who was the head of apps marketing at the time and ultimately the decision maker for those hires, you know, went the extra mile to bring me up to Microsoft so I could meet international people. Uh, the country managers were in town for a meeting. He paid for me to come up to Microsoft to meet them because he knew I wanted to work ultimately overseas. And even though Microsoft didn't do it at the time, he went out of his way to do that. So, you know, you just had this sense that the people were great. Second thing is at that time, so again, 1988, tech is obviously starting to blow up, and the PC is going great guns. And I had the opportunity to switch from a finance background into marketing and to work in tech. And the other jobs I had that I got had offers on were better paying, uh absence of stock, but were better paying in salary, but were in medical instruments and consumer marketing and other places, which just weren't frankly that interesting. And Microsoft offered this, you know, an incredible opportunity to do that. So um, and I'd spent a summer in the Northwest in Portland, so I knew I knew about the weather, I knew about what I was getting myself into and actually liked it. So it was just a lot of factors that came together in a in a really good way.
SPEAKER_05:That's been the secret of Microsoft, right? Get everybody here the summer and then get get them after that. For sure. So let's um kind of uh shift into this consumer division. Um Microsoft had committed itself as a software company, was not going to be a hardware company, uh, had never no pedigree per se in hardware at that point. Now you are deciding to take on arguably uh at that time I would think Sony was the best hardware company. Apple was there, but Sony was had that Apple-esque halo around it, right? So what gave the confidence other than the fear? There was some existential threat that Sony could take over the living room. Uh but there was but there was also that you need this confidence more than the you know to overcome the fear that you can do it. What was the team's confidence saying, hey, we can we can blow this thing up uh other than pounding the chest to the external world? There's has to be an internal capability or uh leadership that said we are going to do it.
SPEAKER_03:So it's super interesting. Rick tried for five months to not do it. Um the original idea, actually, was for Microsoft to OEM the spec to other OEMs. And Rick went out and talked to third-party publishers about it, and and he talked to the hardware OEMs as well. There's people like Samsung and people you'd expect. And everybody uniquely hated that idea. Samsung hated it because they didn't think they could make any money on the hardware, and they were right about that. And people like Electronic Arts and Activision hated it because they thought that the person who marketed the hardware had to also market the games, and that separating those two things were bad for the business. And they had just lived through this experience with 3DO, who tried exactly that model and failed pretty miserably. And so truthfully, when we got to December, the answer was do this ourselves or don't do it. Um so that's part A of the answer. Part B of the answer is you know, you have to go back to the time. Microsoft was at the you know, and it's now in a wonderful place as well, but it was at the peak of its sort of uh existence at that point. I mean, we were at the top of the technology food chain. And with all due respect, I think most people in Microsoft didn't think the hardware was that hard to do. You know, we kind of looked at that, oh yeah, the PC manufacturers, they make PCs. Yeah, yeah, yeah. It's but sure, we could do that. And I hate to say it, but there was um an ego level and a little bit of an arrogance level about you know, we can do this in part because Microsoft had attacked so many new businesses at that point, true just on the software side, but it'd been successful in almost every step of the way. And so the idea that putting together what was essentially a PC architecture in a box was gonna be difficult, you know, we said, sure, there'll be some challenges with it, but we're gonna go ahead and do it. And and and there was a bit of blind faith. And you know, if the the if I think about it in in hindsight, if I knew in 2001 when we shipped the product, if I knew then, if I'd known the same information I had at that time back in 1999, I might have recommended to not do it. Um it was truly miraculous and a testament to an amazingly dedicated group of individuals that the hardware actually shipped. I mean, literally at the end, we were using duct tape in the manufacturing facility. Our DVD drive had a rattle to it, there was a problem with that. They had to duct tape it to the frame of the of the console to make it not rattle in the initial implementation. I mean, they had to work so hard. People went and lived in China for like three or four months to just ship it. Um so it was an incredibly hard thing. And you know, we lost, you know, depending on how you do the cost counting, five, six, seven billion dollars in the first four years. And all that was because of the way we did the hardware. That's not a complaint to the hardware team. They did what they had to do to ship the product on time, they lived to the spec. But it wasn't until we got to the second version of the product that we actually knew enough to how to do the hardware the right way that would work in the video game space that you could cost reduce and price at the right level and and not lose your shirt that we got it right. And you know, not many companies could survive that.
SPEAKER_05:So did Microsoft did it become profitable then during that time you you were there?
SPEAKER_03:Uh oh, the first the first four years were not close to profitability. We turned profitability once we shipped Xbox 360. Um, and the hardware, I don't think ever got profitable. The thing we had to do, uh we lost we lost$50 a unit at the gross margin line in the first version. So every time I went in and told Steve that sales went up, that meant that profits got worse. And the more we sold, the worse it got. In Xbox 360 land, we probably broke even on the hardware. And collectively, over the lifecycle of Xbox, I suspect that's maybe they make a little bit of money now. Phil's a smart guy, so maybe he's he's smarter than we were at the time, and maybe they make a little bit of money on the hardware. But the business model was never really designed for the hardware to make money. The business model was designed to kind of break even on the hardware. You know, that's the razor, and then you make money on all the razor blades. You make money on Xbox Live, you make money on peripherals, you make money on games, you make money on third-party royalties, la la la. And in the second version of Xbox, we did that really well. Xbox 360 was a very profitable product.
SPEAKER_05:You had this uh unique relationship with publishers, right? Because you could you you are a publisher, then you had to bring other publishers to get on board with your hardware. There was uh questions whether you would you know that you know that would be a long-term thing or not. How did you at that time convince everybody this bet's the best bet they could make? Because the publisher had to make a bet. Because they were they was working on other devices at this point, or they were publishing for other for either Sony or Nintendo or something like that.
SPEAKER_03:Well, we we had an advantage in this respect, which is that Nintendo increasingly didn't want and didn't care too much about third-party publishing. I mean, they had so much of their own content and so many of their own franchises that they didn't want the competition. And so they weren't recruiting heavily for other people to join their platform, and they actually were making it difficult for people to publish on their platforms. And Sony was just not very third-party friendly. You know, they sort of felt like, hey, we're the only game in town. If you want to pu Electronic Arts Activision, if you want to publish, come to the PlayStation. But this is what it's you're gonna have to pay us the royalties, and sure we'll help you a little bit. But in particular, if you were a second-tier or third-tier publisher, you got zero love from Sony. So our strategy was to be the publisher's best friend. And so basically, when we went to meet with them, first thing, first, first things first, uh, I went to meet with every publisher twice a year. And I don't think the head of Sony meant to meet with any of them except when they were at a trade show, maybe. But we did visits at their facility every and we shared with them everything we had. We answered every question they had. So there's a personal commitment aspect to this, not just from me, but from the senior person at Microsoft. Um, sometimes we got Bill and Steve to meet with them. They knew Microsoft cared about what they were doing way more than Sony did. The second thing is we were really uh quite aggressive about making it clear to them that if you want to have a balance to Sony's power in the marketplace, you need somebody with Microsoft's pocketbook there. And you need somebody with Microsoft's capability to balance out what Sony's doing. Our success will make you more money. Uh, not just because you'll sell units on our platform, but because it will keep Sony honest in the marketplace. Um I think that was a key reason why Electronic Arts uh signed up is because they were struggling in their relationship with Sony and arm wrestling over power and royalties and all the rest. And then the third thing we did, which was a George Peckham innovation, George led our third-party group. We basically said we're not going to offer volume discounts to publishers. So you might say, well, electronic arts and activision probably didn't like that. And the truth is they didn't. But it did attract the next level of partners to the platform because they were getting killed by these volume discounts. They, you know, Sony or um PlayStation PlayStation, Activision and Electronic Arts were um getting discounts on royalties, so they're paying less royalties to Sony, which gave them some pricing power. And people like Ubisoft and THQ and others didn't get those discounts. So we basically said to people, there's no volume discounts. If you come to us with an idea, we will jointly market it with you. So we'll pay for some marketing for games we like. But we don't care whether those games come from Activision or Electronic Arts or Ubisoft or THQ or somebody else. And, you know, ultimately that leveled the playing field a little bit in the publishers. And if you were EA in Activision, you didn't mind it so much because you had Call of Duty, which you knew we were going to support. You had Madden, which you knew we were going to support. So you got your discount in marketing, not in royalty dollars. But if you were Ubisoft and you had the Tom Clancy series and you were getting no love from Sony, you could come and be the first guys to do a great Xbox Live game with a Tom Clancy series, and suddenly you had a big market and you got supported by us. So the combination of all of those things worked really well uh with our publishers. George and his team were a little known but secret to our success. I go in a meeting, you know, sometimes you go into a meeting with the publisher and you'd be talking about their upcoming game titles, and it was clear that George's team knew as much or more about the upcoming game titles as the senior leadership at the publisher did. Um they were really deep with the development teams, really deep with the external development teams. And having that level, this comes from Microsoft's historic work with developers. Right? And there's some DNA in Microsoft about developer support and management that carried over into the Xbox world that was really powerful. And again, doesn't get written about a lot. They don't get a lot of love or credit, and they deserve a ton of credit for what we did with those guys.
SPEAKER_05:So you you think it's very cultural at that point that you your first 10 years in with the mothership, as you described it, allowed you to really understand it, and that became cultural in Xbox as you built it.
SPEAKER_03:Look, uh there's a we build a platform thing that everybody sets. Uh, Microsoft, because we had lived that for so long and really knew what it meant to build a platform and knew what it meant to attract third-party publishers. I mean, Lotus and WordPerfect were third-party publishers. And so the fact that we understood how that worked uh was really powerful. And we had people inside George's team who really understood that DNA and what it meant to provide that support. And by the way, it wasn't just the publishing team. We had developers who were assigned to work with those publishers. So they were actually helping in the development of the title. When Xbox Live required you to use voice, every one of our publishers said, Oh, that's crazy, that'll never work. You know, people worried about bandwidth and all the rest of the stuff. Well, the development team created a bunch of tools to make it easy, and then we had developer support who went and worked with them and helped them implement it. And suddenly it's possible. And that's all old school Microsoft. That's all old school Microsoft.
SPEAKER_05:Let me ask uh uh just a tangential question, right? With the experience that you had by then building Xbox and hardware and all that, was there ever a discussion that you would build an Xbox phone? Because it would have been an you already were in China, you knew how to build stuff, right? Was there ever a thought process?
SPEAKER_03:Like well, the actually the thing that people wanted us to build was what the team called X Boy, which was a competitor to Game Boy. So a handheld game. Remember, phones in these early five years, phones were uh a really a very separate category. And were not um honestly all that digital, right? There weren't screens on, yeah, right? So, or at least not real screens on them. So um the thing they wanted us to build was Xboy, and the problem with that was it was a nice brand connection, but technically almost no synergy.
SPEAKER_01:Yeah, yeah, yeah.
SPEAKER_03:So the idea that we're gonna take on Nintendo in handheld gaming while we're taking on Sony and Nintendo in console gaming, yeah, and build yet another piece of custom hardware in a different form factor, and need new games. And I mean, we would have had to basically recreate a whole new Xbox team to do that. And we just we talked about a lot and we just Said no, we're not gonna do that. Um, you know, eventually, as I'm sure you'll get to, uh, we did try to do Zune. We'll talk about why that didn't work. Um but um we never really talked about doing a phone inside the Xbox group, at least not to my knowledge. Um ultimately phones came to join my team, the mobile group came to join my team, and ultimately we did do some phones, but um not in the time where I was not in those first five, six years of Xbox.
SPEAKER_05:Right, right. But uh you touched on Zoom or or but you know, other hardware uh experiments that you went on. Other than you know, Microsoft had to be a better uh iPod. What was what was the thinking? Because there was not, did you have this knowledge of how to handle publishers? Because a whole different genre of cat of devices.
SPEAKER_03:Yeah, I think there was a number of challenges in Zune and a number of successes. So kind of have to catalog both of those. Uh challenges. Uh so first, why did we do it? All right, Zoom was designed to deal with the fact that uh, you know, we had all these Windows Media players out there, none of whom were gaining traction against Apple, and none of whom who were successful. And truthfully, if we're honest, the experience on those players was nothing like the experience on an iPod. Just wasn't as good. And the reason it wasn't as good is because you had, you know, nobody organizing the total consumer experience. Right? You had the Windows experience on top of another piece of software on another piece of external hardware that was all kind of glommed together, and the scenes showed. There are cracks in the experience, and the experience just wasn't very good. And so we had this discussion about, well, to make the experience good, we have to do it ourselves. And again, the decision was made that you know having iPod control what was going on in the music space wasn't good for Microsoft long term, and so hence Zune was born. Now, why did Zune not succeed? A couple things. One, we were very late, like we were with gaming, like even later. Two, in the gaming space, Sony made a number of mistakes with PlayStation 3 that we were able to take advantage of. Honestly, Apple executed like a machine. They just didn't make any mistakes. They didn't leave us a crack to get in there. Um, and three, uh we made some big bets in that space, and uh the bets were good bets and mistimed. Um so, as an example, we bet on a subscription music service. And the Zoom subscription service was like five years before Spotify, and it was a really good idea. And the music labels weren't ready for it and didn't want to support it and made it very difficult for us to do it. Consumers, frankly, weren't quite ready for that. This was right in the heat of iTunes being successful and people buying 99 cent songs. So the idea that you would buy a subscription and pay for that every month and consume your music that way just wasn't quite ready. You know, this player, leave aside the hardware for a second, the Zoom player was a great player and had a really nice user interface, was really good, and it was Spotify Spotify. Um and you know, that team, uh, the software team should be really proud. The hardware team did great work, they were just you know constantly chasing Apple's great work, which was really hard. Uh so there's a there's a timing factor and a business model factor and an ecosystem factor there that just worked against us. And being late made it made it worse. It's it's one of the things, in my reflection on my time at Microsoft, it's one of the things that I get underrated, which is timing really is everything. If you think about so many of the innovations in the marketplace, you know, Microsoft oftentimes had the right idea mostly too early. You think about automotive and automation in the car. Really good ideas, probably too early. You know, media server. Uh, there was this thing called Tiger, you guys probably remember that. Really good idea too early. Um pen and handwriting, really good, probably too early, and maybe not quite the right technology because capacitive touch would turn out better. Um, there's just a bunch of things where we get the timing wrong. And then we had some things where we were too late. And uh uh phone certainly falls in that category. Um, and so did the the music space and and gaming almost. If Sony hadn't made mistakes, we we might not have been as successful.
SPEAKER_05:So Sony is still a dominant player in the in the uh in the gaming space. So thinking back, going back to 1999, you said, hey, if I'd known things, I would not have recommended it, right? Now that you know where Xbox is and where Sony is, where Nintendo is, and if you were to go back to the same room where Steve asks you, hey, would you be doing it? Whoa, what would be your advice to him or or the current CEO?
SPEAKER_03:There's two there's two different issues here. If you say, hey, would you like to own the Xbox business? Today's Xbox business, I'd say 100% absolutely yes. I think Phil and the team have done a fabulous job a little bit extracting the games business from the definition of the hardware and making more of it a cloud-based service and and really thinking about that in a great way, making it a content-driven business and all those kinds of things. And I think they've done an excellent job doing that. So I think it's a great business. Um now, if you say, is it a great business for Microsoft? Right, it's a little bit of a trickier answer because Microsoft, honestly, today is not that much of a consumer company and was more of a consumer company when I was there than it is now. I mean, even Office, when I joined it, um, was a consumer business. We sold it Ahead software, right? And it was a package product consumer-oriented business. Of course, then it went on to become an enterprise business, and now most of Microsoft's business is very enterprise focused. So in an odd way, it's it's not the perfect fit. I suspect that, and I don't know anything from anything, but I suspect the reason they continue to invest in it is it does drive innovation and new ideas and new talent into the organization and new ways of thinking about things that is powerful for the enterprise side of the business. And it's an innovation engine for other things. Um I think that's real. I think that's real.
SPEAKER_05:So you know, so they made a huge uh acquisition, right? Actually, yeah. So what's uh what's your take? Given there's this AI thing that's looming, theoretically, this the power is shifting to everybody in some new world order where anybody can be a publisher uh in theory. Uh let's let's assume that. Where how would you rate that acquisition knowing that they probably knew AI was coming, anyways? Is the charge still there?
SPEAKER_03:Yeah, so I'm far from the expert on this. I would say a couple things. One, Activision was clearly an undervalued asset that needed to be sold. And it had nothing to do with their gaming assets, it had everything to do with some things that were going on in the company. And so the asset had been hit pretty hard. So I think they got good value for the money, let's say that. Even though it sounds like a lot of money, Activision's a huge company with some just incredible content. And it's important to note that they had a lot of mobile gaming content, so it kind of made the portfolio at Microsoft much more multi-platform, and they have a lot of PC gaming content, so now you've got phone, PC, and console. You really are becoming more of a content company than you are a hardware company, and I think that was part of what the the strategy was behind. Robbie's opinion, Robbie's been gone for you know 15 years, so what does he know? But that's that's my that's my opinion. As far as AI goes, uh I think this is an unknown. Uh sure, I think code could be written with AI. I'm not sure the Halo concept gets created in AI, but I'm a believer that human creativity is a difficult thing to recreate. Could could you give somebody five first-person shooters and train AI to produce a sixth first-person shooter? The answer is of course yes. Would that be a new creative idea? I don't think so. And so I'm a believer in human creativity. And naming is this weird combination of Silicon Valley and Hollywood. So AI will help the Silicon Valley part of it, sure. It may make it a little less expensive to produce a game. Um, but I don't think it's gonna help the Hollywood part of it very much. And I'm I'm I'm not, you know, if you believe in content innovation and new ideas and new creative storylines and all those kinds of things, you know, maybe you'll be surprised. But I think the human ingenuity aspect of that is really high. And it's very easy to undersell the human creativity part of what goes into a game.
SPEAKER_05:As a novel author, you have to believe in that, right? You you can come up with better stories than any AI can come up with.
SPEAKER_03:And it's it's and the the interesting thing is it's the word better is a funny word. Right? Because to me, there's this innovation, new angle, new push that is the difference maker. You know, you can argue AI might write better code or might write something more efficiently. You can have all those arguments, but the idea that some new twist on what's going on is going to come from some AI engine, which by the way had to learn from some other things, maybe we'll get it. I'm a believer in the advancement of technology, but I'm also a huge believer in the human spirit, and and I do believe that that carries on in gaming. I it I it's the thing that's underappreciated about gaming. You know, how was Robbie able to write two novels that are techno thrillers? If you'd asked people on the Xbox team who's the least creative person on the team and the least likely to write an original novel, I would have been in the top of that list.
unknown:Trust me.
SPEAKER_03:And yet, because I worked in a creative business for 10 years, I learned a lot of that and found part of my brain that I didn't know I even had. And I think it's difficult for AI to replicate that.
SPEAKER_05:Uh as a leader, uh, you know, uh a lot has been said and written about your 3P framework. Can you share more about that too for our viewers?
SPEAKER_03:Yeah, and I I will give credit where credit's due. Um the 3P framework came from an off-site we had as a management team after the original Xbox shipped, and we knew it was screwed up from a business model perspective and from a what's next perspective. And we went off of this off-site um at Salish Lodge, and we said we've got to fix this. And we had sort of this two and a half day battle amongst the management team about how do we fix it. And the silicon team's asking us for direction about what the next version of Xbox is going to look like, and we had no idea. And so Jay Allard had this idea that he talked about about as the peas. And he talked about his purpose, principles, priorities, planning, and you know, how do we write a document that does that? And so we decided we would write a three-page document that described the purpose, principles, and priorities for the next version of Xbox. And uh that document, it turns out you think that's easy. That was super hard. I I did the first two drafts. I I mean, in the end, I wrote the whole thing, but the drafts were heavily edited by other people. The first draft was 12 pages long because as humans, we want to complexify in detail the idea. And the whole idea behind the 3P framework is you get one sentence to tell me your purpose. A computer on every desk and in every home running Microsoft software. One sentence that describes Microsoft's purpose. The company ran on that for 25 years. Pretty powerful. Um, and so the question is can you write that one sentence? And then can you write five principles for how the team's gonna work and how you build culture and how you make decisions? And the Xbox team was completely screwed up on that. And we had to make a lot of changes to get the culture right and get the decision making right. And even an Xbox 360, it wasn't perfect, but it was way better. And then priorities. Oh my gosh, if you'd asked somebody, tell me the five priorities for the original Xbox, nobody could have come up with the same five priorities. We would have had 15 of them. And so getting the team to focus, the team's reaction to the first 3P framework that we shared with the next 46 people was well, thank God you told me what not to do, which is really powerful. And so I've used this, so I've sort of turned this into, quote unquote, Jay's idea into a framework, and I use it in the consulting work and the board work I use. And the first book I wrote, Xbox Revisited, is about that 3P framework. And it really is an awesome way to sort of galvanize a team and say, this is where we're going, this is how we're gonna get there, and this is what we're gonna do to make it happen. I mean, it's strategy at its really core elements. And then we had after that three-page plan, we had this idea that there'd be a 30-page, more detailed plan and a 300-page spec, which ended up being an 80-page PowerPoint deck and about a, I don't know, 5,000-page set of specifications. I don't even know what three Xbox 360 spec count would be. But you let the team develop all of that based on the the 3P framework. And I it has it it has changed the way I think about strategy and changed the way I think about business management in a fundamental way. And and uh you know, I give a lot of the credit to Jay and to the team for adopting it and making it happen.
SPEAKER_05:It seems like it's it's almost excellent life advice for young entrepreneurs. Sherish and I talked to a lot of young entrepreneurs today. It's just good, just good life advice, whether you become an entrepreneur or don't write three pages among the three Ps. If you can figure it out, then get then a 30 will occur. If if it's not good, then it's nothing there.
SPEAKER_03:It's so funny you say that because I have a one-page, I do it in outline form now. Yeah, and I have a one-page three P framework for what I do. Uh my purpose statement is to inspire and empower an army of civic engineers. That's my purpose statement. I have a set of principles that I operate under and a set of things that are priorities. Every six months or so I relook at the priorities, make sure they're right, and keep at it. And I've been using that now for I don't know, seven, eight years. It's super helpful from a just uh getting your mind in the right space. To me, complex problems require great simplicity. And thinking that through has been super helpful.
SPEAKER_05:I think that's the key, right? I mean, the the key is you make decisions simple because you you have a you have this framework within which you put this through, and then everything goes away. You almost have to sculpt your decision down to those three things, and if that was the only three things, it'll it'll all sort of fit. And you will have no most importantly, I don't think you regret because you have committed to the three P's. That's the the challenge with decisions is always regrets. Should I have, could I have, would I have? There's no should, would, could once you made it. But if there's no regrets, then there's no need to look back.
SPEAKER_03:Yeah, and I mean you may be wrong, so you have to accept that the three P's might have been the wrong set of priorities, so you may get it wrong. But the other thing about the three Ps that's awesome is it makes delegation so much easier. Because you can take that document, you give it to the next level of management, and they don't have to ask about priorities. The priorities are there, they don't have to ask about how they're supposed to work, the principles are there. And if you're in a meeting and somebody's acting in a way that's not consistent with the principles, it's easy to point out and say, hey, that's not the way we do things.
SPEAKER_01:Yeah.
SPEAKER_03:It can be super powerful if you really dig into it.
SPEAKER_05:Yeah, yeah. I I think we're going to push young entrepreneurs who come to us for advice to kind of simplify this and say, just give it to your team, they will figure it out.
SPEAKER_03:Well, the truth be told, the original Xbox team was the most talented collection of people I've ever worked with. Uh, but really talented. Uh and the office team, by the way, was too. But I this Xbox team, diversity of talent, hardware, software, services, marketing sales, really the most talented group of people. And totally dysfunctional as a team. And the second version, in part because of the three-pre framework and in part because of other changes we made, was a way better team. And that to me is a just a key takeaway from me. And the ability to move decisions down in the organization, we weren't perfect about it, but we did better, made a huge difference. Uh, because the people who are close to the problem made the decisions.
SPEAKER_05:Yeah. This can't we could talk on this just this topic for a long time, Robbie. Forget Xbox for now. This is the real game we are playing here. But uh so uh Shurish, you know, back to you to uh to wrap things up.
SPEAKER_04:Wonderful conversation, Robbie. Uh brings back some old memories. I'm not a gamer, my son is uh is an avid gamer. In fact, I should uh I could only play for 15 minutes with him because uh I'd be bouncing off the walls and feel nauseous.
SPEAKER_03:I don't know if they're this well Sharice, do not play any virtual reality games. If you're nauseous in a regular video game, the virtual reality game will take you to a new level.
SPEAKER_04:Alright, so thank you so much uh for this conversation and also sharing a 3P uh framework uh for the viewers uh out there. Uh please check out uh Robbie's uh first book, Xbox Revisited. He talks a lot about the 3P framework. I think as an entrepreneur is something that you should look at adopting, and you'll get a much deeper look at that framework in that book. So thanks again and all the best for you.
SPEAKER_03:Hey, thank you, and thanks for having me, and thanks for doing this for Microsoft. 50 years is an amazing thing.
SPEAKER_05:Thank you. Bye. Thank you for listening to our podcast from Startup Exit, brought to you by Dice Seattle. Assisting in production today are Isha Jane and Mini Verba. Please subscribe to our podcast and rate our podcast wherever you listen to them. Hope you enjoyed it.
