John Riccitello is a talker. This is an observation, not an insult; we're frequently accused of the same thing. Ask him the right question, and the former president at such companies as Sara Lee and Electronic Arts (reporting to CEO Larry Probst, whom we recently interviewed here) can expound for days. And when what's being said is this insightful, nuanced and meticulously supported, all you can do is listen closely and take copious notes. Riccitiello is currently a managing director and co-founder of Elevation Partners, a $2 billion private equity fund focused on media and entertainment (Bono is a fellow founding partner.) The company has already acquired leading videogame developers BioWare and Pandemic Studios, and is rumored to be sniffing around Take-Two Interactive, owners of the Grand Theft Auto franchise. We spoke with Riccitiello by phone in mid-October, before the PlayStation 3 and Wii launches, about the state of the industry. Here, in the Part I of a three-part interview, he discusses sluggish Xbox 360 sales; why Microsoft desperately needs a game like BioWare's title Mass Effect; and how he got hooked on Rockstar's Table Tennis.

Microsoft had well-documented supply problems with the Xbox 360 last year, which they resolved by May. They have widespread availability, no next-generation competition at present and a $299 entry level version--which has the same initial price as the PS2 and the original North American Xbox. Yet despite those advantages, 360 sales are still trailing not only the historical sales of the PS2, but also those of the original Xbox. Why?

Lack of software. It's software that sells hardware. Look, there have been some good games on the 360. But there haven't been enough to really get people unearthed from their current Xbox or their PlayStation 2 or whatever else has got their attention. There's half a dozen spectacular reasons to buy the Xbox 360 in the next twelve months, and I think that will really spike it.

Which of next year's games would you point to?

My version of Murderers' Row may be a little different than some people's. GTA for the first time on the platform is going to make a gigantic impression. There's no doubt that people are looking for Halo, and that will make a big impression. And frankly, one of the reasons to be excited about next generation gaming, all in, is our game Mass Effect. You saw the realism, the dialogue system--

Yep.

In the last generation, open-world gaming is what lit it up in a lot of ways. For me, the seminal things were World of Warcraft, The Sims and Grand Theft Auto, for different reasons. Gender-neutral gaming, Barbie house-dolling, whatever you want to call The Sims--that was a gigantic new thing in the industry. WOW obviously brought massively-multiplayer gaming to a new position. And the advent of a true open world with GTA is something that every gamer was looking for.

We've yet to see what the next generation's core innovations are going to be. But the idea that you're not playing a puppet, but that the characters feel real, alive and intelligent--in conversation and in action--is something that the industry has been dreaming about for decades. And Mass Effect delivers that. So I think we're going to see the 360 pick up.

By the way, you saw the September NPD data, right? The industry's up 29 percent.

Right.

And a lot of it was Xbox 360 software. I don't have the report in front of me, but Saints Row was strong, Madden was strong.

But at the same point in the PS2's life cycle, Sony was selling upward of 300,000 units of hardware a month. Microsoft has been consistently been below that mark; 260,000 units one month, 210,000 units another month. There's clearly a softness in the market. Every month, people say things like, "Oh, Dead Rising will drive hardware sales," but sales don't pick up to the extent that people think. The same predictions were made about the impact of games like Saints Row and Madden, yet the resulting growth in hardware sales hasn't occurred. You've pointed a finger at the Xbox 360's games. Is that the only reason?

Well... [Long pause.] First off, I don't think any of us are smart enough to understand the sales curve stuff. If you look at the PlayStation 2 curve, and you compare it to the PlayStation 1, we should have, based on the first year of PlayStation 2--which is the fastest installed base climb I've ever seen, once they got through their Christmas of no hardware--we would have expected 400 million households worldwide to own a console. It didn't happen that way. It was a faster pickup and a slower finish compared to the Nintendo 64/PlayStation 1 cycle and any cycle before it.

I think it was front-loaded for a lot of reasons. There was a lot of heat when Sony launched. The fact that Microsoft was coming in for the first time, and they made a lot of noise. And companies like EA put their entire arsenal on PS2. Out of EA's 30-odd titles that year, only Harry Potter was legacy-only. The whole industry, on software, flipped.

I look at the situation now slightly differently. To me, with PlayStation 2 and Xbox, there's still compelling product out there. A lot of the games that are being sequeled are getting higher Metacritic ratings on legacy platforms than they are on next-gen platforms. There's just a hundred different pieces in terms of how the development came together for this generation that will cause a slightly different [growth] curve. I don't know, N'Gai, if I'm capable of describing the mathematical formula, but it doesn't suggest anything about the potential. I've seen the potential when I look at what we're doing in our studios.

Which of your games makes you confident that this potential will be fulfilled?

The reason I pick Mass Effect as being so important is that dialogue system is something that I think passes just about anybody's next-generation, "Look Ma what you can do on the TV now" kind of test. You'll think it would have taken John Lasseter carefully computer animating this one frame at a time to create something that looks that good, then you realize that you're controlling them around in real-time. It's mind-boggling to people. [See a video of early footage from Mass Effect below.]

You've listed a number of titles and none of them--the best I've heard out of anything that's shipped so far is "It's just like the last-gen stuff, only it looks better." And frankly, in the absence of something new, that Xbox 360 is doing 210,000 units a month in North America seems pretty good. It says that there's demand from this stuff.

This year, you don't get a nuclear war of marketing to sell 400,000 PS3s. But sometime next summer, next fall, next holiday, I'm expecting a nuclear war of marketing. Because Microsoft will at that point still be the market leader, and Sony doesn't know what it's like to be number two in this sector, so they're going to want to invest to get back to what they think is their natural position in the world.

What about Nintendo?

Frankly, I can't say enough positive about Nintendo doing something [Nintendo's president Satoru] Iwata-san told me he would do, in the spring of 2004, which I didn't believe. Which is that they were going to fundamentally innovate, not compete in the CPU war, and come up with something more fun and more accessible that would expand the market. I didn't believe him because it sounded like a fantasy. I've gone from thinking that he was a dreamer to believing that he is a visionary. The Wii is cool. And they build unique and proprietary software.

Unlike in the last generation where I don't think the Nintendo Gamecube had an obvious place to be--other than second or third depending on the territory--now I think they're doing something that's fundamentally innovative. Which broadens the base of the industry, makes it easier for young people to get in, and gives us some new gameplay mechanics. I mean, I want to play Pong with the wand in my hand. Or maybe it won't be Pong, but what's that Rockstar game--

Table Tennis.

I love that game. Actually, it's embarrassing--I didn't buy it; I played it at E3--and got sucked into it for two-and-half hours. But it would be nice to play a game like that with something other than my thumbs. Look, I didn't ever believe I was going to play a plastic guitar before Guitar Hero. And I'm not going to admit that I'll hold a wand in my hand and pretend it's a sword. But maybe I will. I know my kids will.

It's going to be really easy to be an optimist in two years when the cycle is cooking. But everybody gets to be a pessimist around this time. It's normal. It's harder to see around corners.