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March 10, [The Wall Street Journal
Interactive Edition]
------------------------------------------------How Four Renegades Persuaded
Microsoft to Make a Game Machine
By DEAN TAKAHASHI Staff Reporter of
THE WALL STREET JOURNAL
The battlefield of Nintendo, Sony and
Sega gained a big new combatant Friday
when Microsoft Corp. officially announced
one of its most unusual forays ever: a plan to
build a video-game machine called the XBox. Created by a renegade group of
Microsoft engineers who spent months
lobbying the software giant to branch out, the
X-Box is a simplified version of a personal
computer. It has a hard-disk drive and
graphics that claim to be three times faster
than those of other game-machine makers.
The world has known sketchy details of the
X-Box since last fall, when news of its
existence surfaced in the media, but Microsoft
hasn't divulged specifics until now.
Does the world
[Go] Join the
really need another
Discussion:
video-game console?
What do you
That question can't
think of
be answered until
Microsoft's
after the fall of 2001,
recent moves?
when Microsoft
plans to start selling
the X-Box. In any case, the long lead-time
will provide plenty of opportunity for
defensive moves by the Japan's Big Three:
market-share leader Sony Corp., No. 2
Nintendo Co. and No. 3 Sega Enterprises Ltd.
Sony officials decline to comment on the XBox, but they note that they have the
advantage of 70 million current customers
and a long history in consumer electronics.
"We're totally aware that we face some
incredible competition," says Microsoft's Bill
Gates in an e-mail interview.
The entry of Microsoft into game-machine
making is a sign that the electronic-games
industry has come of age. Last year sales hit
$6.9 billion, just shy of movie box-office
receipts of $7.3 billion. And the industry is
expected to outpace other types of
entertainment as a new generation of consoles
takes off. With Microsoft entering the fray,
"this is the beginning of a battle for the living
room that is going to last 10 years, starting
with games and then going into all forms of
entertainment," says David Cole, an analyst at
DFC Intelligence in San Diego, Calif.
Microsoft is already a big player in computer
games, and its "DirectX" software is widely
used to create PC games with intense 3-D
graphics. The company sells games like "Age
of Empires" and "Flight Simulator," makes
such game hardware as "Sidewinder"
joysticks and has a side deal to supply game
software to Sega. It also runs the MSN
Gaming Zone, an online games Web site with
millions of players.
But Microsoft has never built a computer
for sale, and in February 1999 it certainly had
no official intention of making a game
computer. Nonetheless, on the company's
campus, in Building 27 and Building 5, a
"garage-shop" game console was taking shape
in the spare time of four engineers, Seamus
Blackley, Kevin Bachus, Ted Hase and Otto
Berkes.
Existing machines from the likes of Nintendo
were custom-made for games. The four
engineers were designing a PC stripped of
everything game playing didn't require. That
would let Microsoft exploit the huge
economies of scale of the PC industry, using
the same hardware components as PCs and
the same game-programming software,
Microsoft's DirectX. This strategy would also
make it easier for software makers to adapt
computer games to run on the new machine.
The four men soon obtained permission from
their bosses to work on the box full-time.
They began showing their early work to some
higher-ups in March 1999.
The X-Box idea might have stopped there
but for something Microsoft was just starting
to perceive as a threat: the Sony PlayStation
2. Video-game consoles were never much of a
concern for Microsoft, but after Sony
unveiled plans for its new machine in March,
it became clear that the machine could act as a
Trojan Horse, putting Sony into living rooms:
It was a game machine, but also a DVDmovie player and an Internet-access device.
"We were thrilled when we heard about the
Sony plan," says Mr. Blackley, a graphics
specialist and game programmer. "It was
really good for us because it brought validity
to the games market. It was our big motivator
and helped us get noticed within the
company."
Still, top Microsoft executives didn't know
about the X-Box project when they met with
Mr. Gates at a resort near the Canadian border
for an annual brainstorming session in midMarch. The sessions split into eight possible
new product areas. Mr. Gates attended the
discussion about games because Sony's
announcement had riveted executives'
attention to that market. Mr. Gates and other
senior executives concluded that they needed
to move beyond the PC and offer something
new to gamers. Part of their rationale was that
video-game players have traditionally been
the earliest adopters of new technology.
After the retreat, Craig Mundie, a
Microsoft consumer-electronics executive,
acted on the group's decision by forming a
task force on games. He was still unaware of
the X-Box project, but found out about it
quickly when the box's builders showed up
uninvited at a meeting scheduled to iron out
Microsoft's game-computer strategy.
"They were going in the right direction,"
says Robert Bach, the vice president now
overseeing the X-Box, and the four quickly
got approval to keep going.
The first big conflict flared in May. In a
meeting with the X-Box team, Mr. Gates
agreed with a demand from Ed Fries, general
manager of Microsoft's game division, that
unlike competitors' game consoles, the
machine should have a hard drive. He argued
that it was a strategic feature that could make
games designed for the X-Box richer in terms
of animation, audio, speed and expandability.
Opponents responded with the classic
arguments: A hard drive is a liability because
it introduces complexity, cost and reliability
problems. The group decided to keep the hard
drive, but it had to continue to justify its
presence at each contentious product meeting.
Rick Thompson, head of Microsoft's
mouse and joystick hardware division,
became project head on July 21, and he
shifted 20 people from his hardware group
onto the X-Box team. By then he had the
backing of Microsoft President Steve
Ballmer. But Mr. Thompson still encountered
skeptics in the company. They were worried
that Microsoft might lose hundreds of
millions of dollars in the venture.
Mr. Thompson eventually got a boost
from J. Allard, a programmer famous for
writing a memo in 1993 that motivated Mr.
Gates to get serious about the Internet. Mr.
Allard was on leave from Microsoft, looking
for a chance to either "go home or go big."
When he heard about the X-Box from a
friend, he decided to join up, convinced, he
says, that "the X-Box is going to change the
world."
As head of the X-Box's software effort,
Mr. Allard chose to use a bare-bones version
of the software behind the Windows 2000
operating system, known for its stability, as
well as the DirectX software. But the system
was going to avoid the quirks that lead to
frequent PC crashes by running games that
were specially designed for the X-Box. By
this time, the X-Box was pulling in Microsoft
people from all divisions, though Microsoft
won't say how many eventually joined the
group.
Then the outside evangelization began. In
the fall, Messrs. Bachus and Thompson
courted game developers intensely, soliciting
opinions on what would make the best box.
"We were very enthusiastic about the
technology that they were coming up with last
fall," says Tom Dusenberry, president of
Hasbro Inc.'s games division. "As they gained
feedback from developers, they adjusted their
targets on the hardware."
Hardware-component vendors vied to be
designed into the box. Nvidia Corp., for
example, won the contract to supply the
graphics chip only after multiple rounds of
talks.
Then a potential show-stopper hit. The
plan was to have PC makers build and sell the
Microsoft-designed box. In September,
though, Mr. Thompson came back from a trip
with news that PC makers were declining the
job, seeing it as a money-losing proposition.
Console makers, after all, typically make
most of their profit on game software, not
hardware.
The news came as a relief. Mr. Thompson
realized Microsoft would have to make a
bigger bet and take on the risk of
manufacturing, but he believed this would
make it easier to match the prices of rival
consoles and keep the whole project
coordinated. So the group decided to hire a
manufacturer to build machines that would
carry the Microsoft nameplate. Microsoft
hasn't said who the manufacturer is.
On Dec. 21, the X-Box group went to
Messrs. Gates and Ballmer with two options:
launch a less-sophisticated machine in 2000
or a more ambitious one in 2001. Mr. Gates
told the team that Microsoft's machine had to
provide several times the performance of the
PlayStation 2. "We weren't aiming to build a
parity product," Mr. Gates said. He told the
team to wait until 2001, which would let it
use a Nvidia chip that operates at a trillion
operations a second, as much as three times as
fast as the Sony machine.
At the end of the same "go or no-go"
meeting, Mr. Ballmer said, "You're asking me
for a decision on this with a Big 'D,' not with
a little 'd,"' meaning that it was a long-term
bet. Then Mr. Ballmer turned to Mr.
Thompson and boomed: "Go!"
After Friday's announcement comes the
hard part. Microsoft must formalize licensing
arrangements with software makers, focus on
cutting manufacturing costs to the bone, and
contemplate further the "killer" game that the
company knows it will need to succeed
against its entrenched rivals.
The delay may give Sony a chance to
cement its hold on the market with the
PlayStation 2. But Microsoft's early
announcement could lead some consumers to
wait for a machine with more advanced
features. The common high-tech tactic,
branded "vaporware" by rivals, has
angered antitrust regulators in the past.
"We made a big bet with Windows, a big
bet with the Internet," says Mr. Bachus.
"We're making a big bet with games."
Write to Dean Takahashi at
[email protected]
------------------------------------------------------Copyright © 2000 Dow Jones & Company,
Inc. All Rights Reserved.