Microsoft's Xbox: What's Ballmer got to do with it?

There have been many accounts of how and why Microsoft built the Xbox and the Xbox Live service from a technology perspective.

But there is a business side of the Xbox story, too.

I had a chance to talk to both outgoing Microsoft CEO Steve Ballmer and the former chief of Microsoft's Entertainment and Devices Division, Robbie Bach, about the business part of the Xbox equation. (I interviewed them both in late November for a story I wrote about Ballmer's lasting legacy at Microsoft.)

During the late 1990s, Gates had already met with some of the key engineers doing early design work around the idea of a videogame console. But Gates asked Ballmer to determine if there was a viable business around the idea. Ballmer characterized his six-month business review and ultimate approval of the original Xbox plan, back in very late 1999 -- right at the time Ballmer was taking over the CEO role from Bill Gates as being "important for the transfer of CEOship to me."

Bach, who retired from Microsoft in 2010 and currently sits on the boards of Sonos, the Boys & Girls Club of America and the U.S. Olympic Committee, recalled the exact day -- February 14, 2000 -- when the Xbox project got the real green light from Ballmer.

"Steve looked at Bill and he said, 'Okay, we're done. You guys are going to do this. We're going to support you. We understand you're doing it differently. We're going to be behind this. You won't get us second-guessing you again. It occurred right there. And that meeting changed the course of what we do," Bach recalled.

"Steve was never looking over my shoulder day to day. I never felt that way, never on this project," said Bach. "When I needed a kick in the pants, I got it. And when it was okay to just let me go, he let me go. And it was kind of the right way for a project to work. I know it sounds stupid, but to me it all comes back to the February (2000) meeting where he said we're going to make this happen."

Bach admitted that for the first year and a half, the Xbox was "not a popular project" at Microsoft. Even though it attracted a lot of operating system and networking talent from other parts of the company, the team was working independently off the main campus.

"Remember, Microsoft in 1999 is a PC software company by and large," Bach explained. "The idea that somebody would do a piece of hardware that had 1,100 parts in it, with chipsets that were new and at the cutting edge." The software kernel of that was a very small subset of the Windows NT kernel, at that point,"but that the rest of the work we did was completely different. That was a wild concept. And it sounds completely obvious today. But, I've got to tell you in 1999 that was not an obvious concept."

"A lot of people said 'why is the company doing that'? It was clear we were going to lose some money," Bach said. But "Steve, at every step of the way, said, 'No, we're going with this.' And he was the guy who stood behind it and just said, 'I hear your complaints but I'm managing this closely. Robbie and I talk about it regularly.'"

'Steve's hands are all over Xbox'

Bach said Ballmer also helped the team by making the occasional call to Intel and other hardware, software and service partners when needed. And while Gates had relationships with the cable companies, Ballmer had relationships with a number of the telcos, which mattered significantly, given that Microsoft management had bought off on the idea that the original Xbox wouldn't include a modem, but would instead make use of broadband, Bach said.

"Steve stepped back and said for us to be successful in online gaming, that (broadband) is what we have to do, so let's go make sense of that ecosystem. He helped us think through the idea of turning Xbox into a broadband benefit for those guys. Suddenly those broadband providers say, 'Oh, wait. This isn't a tax on our system. It's actually going to use our system. And it's going to help us expand our customer set. So there was really good interaction between Bill and the team, technically, and Steve and the team at a business-model level."

"Steve's hands are all over Xbox," Bach said.

There were times when tough conversations and decisions had to happen, too, Bach admitted. When it became clear how much bigger the initial Xbox investment was going to be, compared to projections, Ballmer forced the team to be disciplined about the financies, reforecasting the business, getting on budgets and revising plans. The message was even though Xbox was important, it wasn't going to be a bottomless pit, Bach said.

"He was willing to step up and say, not be irresponsible with money, but invest it, and he forced us to account for it all and he forced us to stick to the plans once we reforecasted. But he wasn't shy about doing that. I think there are other people who would have looked at it and backed away. It just wasn't in his mind. We never even talked about it."

That said, Ballmer was no push-over. After making a big initial investment, he wanted to know how the team planned to make money. As work began on the Xbox 360, the conversation became focused around metrics and commitments by the business to make a set amount of dollars over its lifecycle.

"The first thing we had to do is we had to design our hardware to break even," Bach said. "We stopped using off-the-shelf parts, because you can't cost reduce off-the-shelf parts. We had to build a bunch more custom design. We had to own our own chip design, even though somebody else was going to do it for us, because if you don't own it, you can't cost reduce it.

"We had to think about even the size of the console. Everybody wanted to make Xbox smaller because the original Xbox was big. It turns out the size of the package determines how many packages fit in a shipping container, and then how many of those shipping containers fit in a sea container," he continued. "And it turns out you save a huge chunk of money if you get the package to a certain size because you can pack more in per shipping container. I mean, it got to that level of detail to try to rearchitect how we were thinking about the business."

When the "red ring of death" console failures started happening, resulting in Microsoft having to write off close to a billion dollars, Bach was the one who had to deliver that message.

"It's not that he dismissed it. He was pissed about it. But he knew the team was doing everything they could," Bach said.

"Steve is a very disciplined, hard-core person. When you make a commitment, he expects you to keep it. And at the same time, he understood that this was a new venture. It was hard. There were obstacles that were going to come up that we weren't ready for and we couldn't anticipate, and he had to be flexible around that," he added.

Kinecting the dots

When the team designed the Xbox 360, the thinking was it had to last beyond the five-year lifecycle that was the norm for consoles at that time, Bach said. It was obvious that graphics chips weren't going to get a whole lot better during the Xbox 360's planned life. That's where the Kinect sensor which provides voice and gesture recognition came in: It was going to give Microsoft a way to breathe more life into the 360.

Ballmer was key to helping connect the dots across the company and beyond, Bach said. Some of the Kinect technology was developed by the Xbox team. But some also came from Microsoft Research, and other pieces from other companies.

"Steve had to get involved," Bach said. "We had to buy a company in Israel. We took a long-term license and eventually bought a company in California. Steve had to be involved in all of those because they're board-level-approval transactions. And so he really invested in saying, hey, this is the next great thing."

While Gates has the ability to go deep and ask great technical questions, Ballmer was always about the value proposition, Bach said.

"Steve wasn't in that chip architecture meeting," Bach said. "But, when we want to talk about how we're expanding, going to blow out the Xbox Live business, he was all over that business.

"Bill would come to that meeting to yell at us about the ID authentication system. It was a particularly passionate issue for him and one that we weren't very good at," Bach recalled. But Ballmer "would want to talk to us about how we're thinking about subscriptions and what the value proposition was, and what went behind the subscription wall, and what was in front of the subscription wall. It felt like exactly the same meeting Bill would have, but from a different direction. The same passion, the same desire, the same engagement, and by the way, the exact same memory."

Bach didn't have a whole lot to say about Xbox One or about pressure by some Wall Street investors on Microsoft to sell or spin off the Xbox unit, as he hasn't been with Microsoft since 2010.

Ballmer said that he regrets how long it took Microsoft to turn a profit with its Xbox business, as well the length of time it took to get to the point where Microsoft is now with the underlying Xbox One architecture. But he's still is bullish on building the Xbox asset, he said. 

"Most people inside and outside the company thought we were crazy," Bach said. "I met with all the partners. They're like, 'are you guys serious'? The number one question I had to answer from publishers when we were getting ready to launch Xbox was, is Microsoft really serious, because they just couldn't in their brain get their heads around the idea that Bill and Steve were that committed to this."

But, Bach insisted, "We got it right more than not."