Microsoft's Peter Moore and the Kansas City Chiefs' Larry Johnson
In Part I of our four-part Q&A with Microsoft entertainment and devices corporate vice president Peter Moore, he revealed the origins of his love for baseball and American football, discussed the subject of his bachelor's degree thesis, and explained why, if Xbox becomes the market leader, he'd prefer to be seen as its de Gaulle than its Churchill. The subject of our second installment switches from history to math, as we spar about whether or not, in the face of no next-generation console competition, the $299 Xbox 360 Core should have helped Microsoft achieve at least first-year sales parity with the first Xbox. Please note: this interview was conducted during the January 2007 Consumer Electronics Show, without the benefit of sales data from December 2006 and subsequent months.
On to where things are at today. A lot of the executives at Microsoft, yourself included, in the run-up to the release of the Xbox 360 spoke a lot about the importance of being the first to ten million units; that the first to ten million wins. Effectively, that's a statement of unassailability. PS2 certainly got to ten million first and was definitely unassailable. But looking at the position right now, a) we know that it was unclear as to whether that meant ten million shipped or sold--
Right.
--but your position doesn't seem unassailable right now.
So my comment--I'll tell you exactly what I said, because I said it in London a year [ago] last summer, and this is where the ten million number was first heard. It was at the ELSPA conference [Entertainment & Leisure Software Publishers Association], and I said, "History tells us that the first guy that gets to ten million is in a really, really strong position." Those were my exact words. And I still stand by that. History tells us--in our industry anyway--as you know even better than me, that getting that critical mass develops a lot of goodness in the ecosystem. You've got publishers who now have an installed base of substance to sell into. You've got developers who are now used to developing games; are getting used to the architecture; feel comfortable about what they're developing into from a technical point of view. And you've got consumers who are getting a lot of games to choose from, so the selection of games becomes broad and it becomes deep. All of that comes together. So ten million, I think, is a good critical mass, particularly if you can achieve it before the second holiday. And that's always been my point. I don't think anybody ever said, "He who gets to ten million first is in an unassailable position."
I'm pretty sure J [James "J" Allard] said "First to ten million wins."
Did he? Ah...then if J said that, you're going to have to ask J. I can sit here today and tell you I have never said that. But boy, I'd rather be first to ten million than trying to play catch up.
I spoke with John Riccitiello for my blog, and he told me that the reason that hardware sales for 360 were slow for much of 2006 was the lack of truly next-gen software. Would you agree with that?
Not really. The question--and I saw your blog on that--John's comment was just a personal comment as an observer on the industry. From Call of Duty 2 onwards, which I thought was truly next-generational when I first saw it, to looking at games that were coming in 2006: Oblivion, I think. It depends on [what you mean by] next-gen. A lot of people say next-gen" and they just put it down to graphical fidelity. That's a component, but utilization of Xbox Live...I even say sound and audio, which people don't pay a lot of attention too, but I think audio becomes an important part of what we're doing. We're certainly spending enough money on that now in our development budgets. And a lot of people, yourself included, have pointed at Gears of War as being truly next-generational in the way it looks, plays and feels. I think there are a lot of components, N'Gai, into next-gen, graphical fidelity being just one.
Right, but I think his point, though, was that there was certainly software that was getting really good reviews; there was certainly software that was selling well; and it wasn't pushing sales of the hardware. And so he was looking at it and saying that the big games of the previous generation, games like Sims on the PC, like Grand Theft Auto III, games that defined the previous generation--he hadn't yet seen those defining games that sort of push people out and make them get the hardware. Even based on the numbers, assuming it was about a 2 million hardware units Christmas, based on about 2.7 million units of Gears of War sold, my guess, and I don't have the numbers right in front of me, is that's not matching the hardware push Sony was able to get in its second Christmas out of games like--
Grand Theft Auto III...
Grand Theft Auto III, Final Fantasy X, Metal Gear Solid 2.
Did you think Grand Theft Auto III was next-gen when it came out?
[Pause.] Did I think it was next-gen? Are you asking me?
Yeah.
Well, it took me a minute to get to it. And the sales certainly bear that out. It really started taking off in early 2002. I'd actually seen it much earlier, and I was like, "Wow, this really does start to feel like something different."
Different, yeah.
And as I got into it more, realizing the world that they had created, it definitely felt like a breakthrough. And I would say even before that--because it was more anticipated--Metal Gear Solid 2 definitely felt like a breakthrough because of the way it was bringing the environment to life.
Do you think that Grand Theft Auto III moved hardware? Because Sony refutes that.
[Laughs.]
They do. Whether it's sour grapes, or what, I don't know. But I was surprised. I'll answer: it definitely moved hardware. I was in the throes of that whole thing and it definitely moved a lot of hardware. But for whatever reason, Sony isn't willing to admit that it moved a lot of hardware. Grand Theft Auto III was absolutely next-gen, no doubt. In its experience; in the way it played; the ability to roam freely and do things in a way you'd never done before.
Back to what I was trying get at: why was there a discrepancy between the software sales you were seeing and the hardware being consistently under 300,000 units a month all the way through October.
I think one of the keys is that people were buying a lot of games. Certainly the attach rates have been phenomenally strong. That's the first criterion that publishers look at, then they say, "Okay, people are buying a lot of games; it's my job to be able to sell into what is a pretty virile environment economically for buying games. There haven't been the huge games. One of the problems with Grand Theft Auto III, if you recall, was that it cratered the entire ecosystem for three months because nobody took GTA out of their PS2 drive, and it was a very difficult Christmas for publishers other than Take-Two. So I guess my point would be that you're seeing a wider diversity of games being bought. You're seeing it spread more horizontally than vertically, as you saw during that period of time. The attach rate is something we focus on a lot.
But again, when you look at the numbers through June 2006, the attach rate on the original Xbox was somewhat lower, but that's because more units of the original Xbox were sold. In fact, the total amount of software sold through June was roughly the same. So again, if you're going to point to the attach rate, it seems like part of the reason the attach rate was so high was because fewer Xbox 360s were sold. Obviously, I'm not disputing that the installed base for Xbox 360 was extremely active--that's great for publishers, and ultimately great for Microsoft--but the fact of the matter is that the reason the attach rate was higher than the original Xbox is because less 360 hardware was being sold.
The one thing that's important to me is the ecosystem. Am I offering consumers a wide array of gaming experiences? I think the answer's yes. More importantly, EA will tell you that they have doubled their sales on a unit basis this year over last year. And that's important to me. I care about consumers, I care about retailers and I care about publishers. I also support developers where I need to. All of those constituents are very happy with the state of the business right now.
Another thing that some people have pointed at to explain slower-than-expected sales of Xbox 360 last year was the $399 price point. It's obviously more expensive than consoles of the past.
Yeah.
But you also have a $299 SKU available at the same price as the PS2 and the original Xbox, both of which sold more units over the same time frame, through at least November; I don't have December NPD sales yet. Why didn't the $299 SKU drive more hardware sales for the platform?
Why didn't it?
Why didn't it?
Because I think in this early going, the $299 SKU, or the Core system, is a long-term part of our strategy on a global basis to apply different price points for different consumers. If there's one criticism that you and everybody has had of the original Xbox, it's that we were too hardcore, we didn't offer a broader reach of game experiences, of different price points for the hardware that we should have done. And we never got below $149 when the Xbox finally rode off into the sunset from a sales point of view. We're running about 80-20 right now, Xbox 360 to Core system, but we're seeing some strong Core system sales, particularly in Europe, where price point is so much more sensitive. We look at the business now, and you're exactly right. At $399, where the bulk of our sales still are, we've done pretty well. The question you have to ask is, how big is the global business at $399, or 399 Euros, or 279 pounds, whatever we accrue it to be now at the current standing? And at what point do we think we've done well as an industry in being able to drive strong sales of hardware; $60 software; as well as get new revenue streams from online, such as advertising that helps our publishers, subscription fees for Xbox Live, you name it. We're entering a different phase of what the business model is all about, and I feel very comfortable with our number that we've sold. I feel very, very validated that we've hit our number, and exceeded our number right now. As well, we hit our Live numbers, and are on target to hit the 6 million number by June very comfortably. So when I think of the business, it's very difficult to go back and compare it to the previous generation, because the business models are starting to evolve very, very differently.
Yeah, but at the end of the day, if Sony was able to sell that kind of hardware at $299, and Xbox 1 was able to sell that kind of hardware at $299, it seems to me that you should have been able to--
But there wasn't a $399 choice, right?
There wasn't a $399 choice?
When you're talking about the launch prices of the PS2 and the Xbox--we're offering a lot more of an experience now and there's a cost to that, as evidenced by $500 and $600 for the PS3, we're at $299 and $399. When you have something at $399 that offers as much as we do, then something's going to suffer in the early going, and the $299 SKU--I'm not quite sure where you're trying to take me on why the $299 SKU...it is a long term--
I'm just asking the question. It seems to me that--
We should have sold more?
You should have sold more. Presumably, if the experience is that great; if there are all these people that still aren't actually playing online--a lot of people who are Xbox owners are, but there are plenty of people who don't. If they look at their friend, and they see that he's got Call of Duty 2, he's got Oblivion, he's got Fight Night Round 3--these are all great games, regardless of whether or not you go online--shouldn't that person at least buy in at $299? Look at your own message: it's about choice, it's about not making you overpay for features. Shouldn't that person have said, "Let me get in at $299, let me get some of those games and then when time comes, I'll buy the hard drive, I'll go online. Heck, there's Silver even, I don't even need to pay to go online yet." So I'm still not understanding why--
I think they've stepped up for the $399 SKU.
They what?
I think they must have stepped up for the $399 SKU. If we're trying to figure out the guy who paid $299 before, all I'll say is that they've stepped up and paid $399 this time around. That's the only thing I can attribute that to.
But if that were true, the numbers would be the same. So clearly there's some--you would have thought, I would have thought that the $399 SKU would have been additive to at the very least what was the original Xbox's installed base.
No. No. You're assuming more consumers are coming in earlier at a higher price point than were there previously.
No, I'm saying, at the very least, someone should look at it and say, "$299--I can buy in just like I did before, and if I've got more money, I'll get the $399 model." So shouldn't you be able to capture the same amount of guys you got at $299 with the original Xbox, as well as some of the guys--
We never looked at it that way, N'Gai.
How did you look at it?
We looked at it saying, "We need to install a base; we need to get to our ten million unit mark; we think our mix is going to be--and we were pretty accurate--we think our mix is going to be 85-15 in the early going; that mix will start to evolve as we start to evolve both our geographic reach, as well it will allow us pricing flexibility in the out years to be able to drive prices down to where the real meat is of $199." As you know, the real sweet spot becomes $199 and below. Eighty percent of the PS2 installed base has now been sold at $199 and below. I mean, that's where the real money is.
To allow us to be able to do that, we felt the Core system was very, very important. Is it paying off right now? Potentially. But it will really pay off in the outgoing years, when it will allow us to get to price points that we potentially we couldn't get to if we just stayed with the Xbox 360 [Premium.]
So you don't think that in hindsight, looking at the bulk of sales being the Premium SKU, that it might have been better from a positioning perspective, a marketing perspective, to have held off on the Core until this year--
No.
--or whenever, say, there was a price drop on the Premium SKU?
No, we wanted to establish the Core early. We felt that having two SKUs in the market was something we wanted to establish from the get-go. We spent a lot of time with retailers before we put these plans to bed--this would be back in 2003--we were sitting down with retailers and giving them our early plans. We also spent a lot of time with third parties. A year before launch, we had made our mind up what we were going to do, and third parties liked the idea of having this. Even developers--because of course, we were throwing a different wrinkle--in that a hard drive wasn't required; that was a change from what the developers had to deal with. So we spent a lot of time with the development community, letting them know what our plans were.
This was done not in a vacuum and not as a unilateral decision from Microsoft that our partners disagreed. Retailers in particular liked the flexibility we were giving them on pricing. It allowed them to be a little more promotional than they could typically be in the early going.
Next: In which Moore discusses the Stamper Brothers' departure from Rare, explains exactly where the troubled studio fits into Microsoft's plans, and riffs on the essential differences between the comedic sensibilities of Brits and Yanks.
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