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

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

Summary: Outgoing Microsoft CEO Steve Ballmer played a bigger role in establishing the Xbox as Microsoft's stake in the living room than many realize.

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

xboxballmer

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.

bachxbox

"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."

Topics: Steve Ballmer: The Exit Interview, Microsoft, Leadership

About

Mary Jo has covered the tech industry for 30 years for a variety of publications and Web sites, and is a frequent guest on radio, TV and podcasts, speaking about all things Microsoft-related. She is the author of Microsoft 2.0: How Microsoft plans to stay relevant in the post-Gates era (John Wiley & Sons, 2008).

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57 comments
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  • No surprise at all that Ballmer was hands on

    He ensured that the company that brought you the blue screen of death in your work life would also bring you the red circle of death in your down time. And that 50% defective rate is Ballmer all the way!
    ShazAmerica
    • The Ballmer Love-Fest continues

      Let's get an in-depth report into how he created the Kin.
      Or how Surface has failed.
      Vbitrate
      • rightly or wrongly...

        this just reinforces my personal disdain for Microsoft, their incompetence and their incompetence at the board level. To me it just seems they stumbled their way through the development, throwing money at it when needed, but pretending to say "keep your eyes on the budget!"

        Looking forward to this new age of competent kick start developers rising up and taking these clumsy giants down...
        Andrew Hargrave
        • really??

          Sure, You can judge a company by 1 guy. There are thousands of other brilliant minds @ Microsoft. And you can't hold a candle to any of them. Tell me what you did to make a positive difference?
          teeboy75
          • what kind of difference?

            really, what difference did these people make?
            oneleft
          • Like the one you make

            If you aren't making one then probably you need to back and sit alone and think why are you like that.
            Ram U
          • "there are thousands of other brilliant minds @ Microsoft."

            I'm sure there are! And I'm sure those brilliant minds have been developing "brilliant" products in the labs for generations (As we've heard). But what difference does it make if the heads like Ballmer who finally admits he's not a tech guy stiffles it, cause he doesn't have the vision to see the potential?
            dave95.
          • World without Microsoft, NSA and American Empire...

            ... sounds not bad at all.
            Frankie1965
        • Could that be the reason you are not in a position of such importance

          as CEO, Mr. Hargrave?

          You look to not understand what has transpired. You are quick to point out the failures, while at the same time making excuses as to why they the succeeded quite well I others areas.

          I fear your wait for Microsoft's demise will leaving you wanting on your deathbed many years from now.
          John Zern
      • The Ballmer hate-Fest continues

        Let's get an in-depth report into how he created Sharepoint.
        Or how their Server, XBox, Kinect, DevTools, Office, Windows, SQL server, ect. products have succeeded.

        But if you want, we can talk Lisa, Newton, social networking, Pippin, G4 Cube...
        William.Farrel
        • yeah

          all those things you list disappeared because they didn't make money.
          so tell me, why is the xbox still around? why is there msn, search (no matter what they choose to call it now), all of their online services, surface? in real business when a product doesn't do well it disappears.
          not at ms.

          as your boy ballmer once said, ms may not be first or the best but they just keep coming and coming and coming...

          translation: they'll throw money at any market they want to be in until the competition crawls away.
          you can't lose when you don't have to worry about a bottom line.

          that's so admirable. what a business plan. have enough money from cash cows that you can do whatever you want. awesome.
          oneleft
          • @oneleft

            "why is the xbox still around? why is there msn, search (no matter what they choose to call it now), all of their online services, surface? in real business when a product doesn't do well it disappears."

            Have you noticed that Apple do the same as MS? Applications like iWorks and FileMaker are doing awful. OS X is free and OS X Server is cheap, and Mac Pro servers are nowhere to be found. Still Apple keep pushing time and money on those products and applications. Looks like your post applies to Apple too.
            dvm
          • uh

            filemaker is doing quite well. which means it does not lose money.
            iworks? yeah, billions and billions and billions of dollars was lost on iworks.
            there is no mac server. it does not exist. it was called the xserve and it was discontinued.

            there is no "same thing". xbox- has lost somewhere around 10 billion, estimates vary. ms online services, has lost over 10 billion in it's over 10 years of existense.
            bing, ballmer says ms will throw up to 10 billion at it to "compete". it's well on it's way to losing that much.

            30 billion dollars will get you:
            2 uss nimitz class aircraft carriers (4.5 billion each)
            an up and running international space station (at 20 billion mark it was receiving visitors)
            a cern large hadron collider (finished at 9 billion).

            and you're talking about iworks.
            oneleft
          • at

            10 billion mark space station was operational, not 20.
            oneleft
          • @Oneleft

            "filemaker is doing quite well. which means it does not lose money."
            Haven't seen Apple numbers for Filemaker. Can you share a link with details?

            "yeah, billions and billions and billions of dollars was lost on iworks."
            Maybe the didn't lost billions. They just abandoned it for years, and this year was released a new version with less features than the one they abandoned. That could be the reason Apple didn't lose billions on it. Anyhow, my post was to answer your line, "in real business when a product doesn't do well it disappears.". iWorks, OS X Server, Safari and Filemaker have been awful compared to their competitors, but still Apple keep pushing money and effort in them. And now they give away OS X for desktop, so there is no money to make from the OS. If I understood your post, Apple is doing wrong supporting these products, right?

            "there is no mac server. it does not exist. it was called the xserve and it was discontinued."

            So you didn't know that Apple had "servers" for years. Don't worry, since looks like a lot of people didn't knew either.
            http://www.apple.com/server/
            And the XServe wasn't the latest generation. There was a Mac Pro Server that was awful, and Apple kept offering it even though it was way behind the competition. It was released in 2010 and discontinued in October 2013
            http://en.wikipedia.org/wiki/Mac_Pro#Mac_Pro_Server
            Now with the Mini, it's worst than before. Again, MS is not the only company that keep products that don't generate or lose money.

            "same thing". xbox- has lost somewhere around 10 billion, estimates vary. ms online services, has lost over 10 billion in it's over 10 years of existense.
            bing"

            Yes, there are loses. Still, Xbox is a strong name in the consumer market. XBO sold 2m consoles in less than a month, and add to that the quantity of Xbox Live subscriptions. If it keep like it started, it going to be very good for MS. Let's see how this generation goes.
            And while Google still the preferred search engine, Bing is not doing that bad. Even Apple uses if for Siri. I don't think it will be as popular as Google, but who know. There are always surprises we don't expect.

            "30 billion dollars will get you:
            2 uss nimitz class aircraft carriers (4.5 billion each)
            an up and running international space station (at 20 billion mark it was receiving visitors)
            a cern large hadron collider (finished at 9 billion)."

            Yes, there is a lot that can be done with that money. Still even with MS misses, they made big hits like all server and cloud services. Sometimes you have to expend to have results. Apple did the same with iOS and look how it went. Always there are risks. Sometimes you win and sometimes you lose. It happens to all companies, including MS, Apple and Google.

            "and you're talking about iworks."
            This was an answer to your line, "in real business when a product doesn't do well it disappears." And iWorks don't do well and should be out of business, right?
            dvm
          • and what

            exactly about BiLLIONS do you not understand? the entire point is the obscene amount of money ms is willing to lose to "compete". how many times do i have to say it? international space station, aircraft carriers, large physics projects kind of billions and billions and BILLIONS! that's the point. BILLIONS. dollars. BILLIONS OF DOLLARS.

            my gawd, reading comprehension, it's your friend.
            oneleft
          • @oneleft

            You seem preoccupied with MS losing money event though they have 16 business doing +$1billion. If you were a gamer, you had noticed that it's a great console and Xbox Live is a great service. Same as the PS4 and PSN. But I suppose that because both lose money, we shouldn't enjoy it.

            What about online services? Outlook.com, Bing and Skydrive are more capable than Apple offerings. But since MS is loosing money in them, I suppose they are worthless, and we should move to iCloud, since is better because Apple is making a lot of money.

            What i find interesting is the quality of Xbox and online services even though they lose money. Both are great examples of what MS is capable. Different from Apple, that abandon or ignore products like iWorks, OSX/OSX Server, Filemaker, server hardware and cloud/online services since they don't generate a lot of money. If you ask me, I prefer the MS way. Which one do you prefer?
            dvm
          • Remember how Cosa Nostra...

            ... was claimed to have earned annually tens of billions of dollars during 1970's and 1980's but in real life made men, capos and street bosses didn't see much of those money. Family bosses hardly saw billions of dollars too.

            Perhaps earning billions of dollars might be kind of mirage - a fantasy. A legend. Guys of Redmond don't enjoy much of their "economic success" when their rivals (especially Linux, Google and Apple) are kicking them out of city.

            Ballmer has seen the future - and it's not bright at all for Microsoft.
            Frankie1965
          • and yet again

            this isn't complicated. ms is destroying competition by refusing to lose.

            ms isn't just losing money, as you so easily dismiss it, it's losing vast amounts of money. fortunes. this is not the market at work. this is simply saying, hey, you don't make money and have to close up shop, we don't make money and we don't care. sucks to be you.

            and this "quality" you talk about. uh, duh. again, who can't eventually build a good product if they can lose billions in the process? that is not admirable. my gawd, yugo could have eventually made a decent car if they'd had a few billion to throw at it.

            if you're fine with the market not working, with big business buying and bullying, then go for it. but call it what it is. it's not good business, it's not good management, it's nothing more than having billions of dollars to throw at it.
            oneleft
          • Your pure lack of business understanding is astounding.

            oneleft, you CLEARLY know nothing about big business. Not a single thing. Your embarrassing to listen too. Its like listening to a drunk garbageman trying to explain how to do heart surgery. Your a clown.

            Don't comment on big business and whats going on when you are so clearly not in any position to do so.

            Your comments are not only ridiculous, they are simply astoundingly stupid.
            Cayble