Microsoft lost $5 billion to $7 billion on the original Xbox, launched in 2001.
Above: Xbox Revisted book by Robbie Bach
Image Credit: Microsoft
Microsoft lost $5 billion to $7 billion on the original Xbox, launched in 2001. And it made billions of dollars on the Xbox 360. Depending on the time frame in which you look at it, it was either an insane waste of money or the finest strategic decision that Microsoft ever made.
Above: Robbie Bach, former chief Xbox officer of Microsoft.
Image Credit: Robbie Bach
Robbie Bachhad to make the call to do it or not. He was the chief Xbox officer from 2000 to 2010. He went forward, and I chronicled the results in two books, one about the making of the original Xboxand another about the making of the Xbox 360. I never got a chance to see the video game business from Bach’s bird’s-eye perspective. I didn’t know, for instance, that he almost quit in 2001, and he even wrote a long resignation letter after a disastrous first revelation of the original Xbox. He has written, a memoir of his time at Microsoft as well as his strategy for fixing our country’s problems.
Bach went on to triumph with the Xbox 360, only to lose in the smartphone war against Apple. And he was blindsided by the Red Rings of Death, the quality problems related to overheating that resulted in a $1.1 billion write-off. The facts from those times are well known, but Bach tells the story in a more emotional way as he extracts lessons from them.
After two console cycles, Bach decided to do work as a “civic engineer” to help fix both charities and governments. I interviewed him about the book and the highlights of his time running Xbox. He’s now able to talk more openly about everything in his experience, including the early decisions, his views of the new Microsoft under Satya Nadella, and whether he wants to run for political office or not.
Here’s an edited transcript of our interview.
GamesBeat: Why did you write the book?
Robbie Bach: I wrote Xbox Revisited because I wanted to start a process where I could have an impact socially. I worked at Microsoft for 22 years. I had a wonderful career there. I had impact in a certain way there, but I wanted to have an impact in a different way.
When you’re an individual, you have to find ways to communicate to lots of people. The three I’ve chosen are speaking, the book, and I do a lot of blogging. Those are my ways of spreading my social impact message the best I can, providing people with tools so they can be more involved in civic and social issues.
GamesBeat: Did you find that it was interesting to turn the tables and be the author, as opposed to the interviewee?
Bach: It was. In fact, what I discovered — I knew this deep down, because in high school and a bit in college I did a lot of writing and enjoyed it. I discovered I love to write. It’s not even the interviewing process so much as it’s the creative process. Deciding you have a point and figuring out the best way to tell the story so people remember that point and it gets communicated deeply.
Each time I write a blog, I have a good idea of what I want to say, but the interesting part is figuring out how to draw people into the subject and expound it to them in a way that they remember. I enjoy that creative process. I bet you never thought of me as a creative person, but this is a place I feel like I’ve found a niche where I can use my creativity.
GamesBeat: Your view of the project was unique, because it was coming from above. That’s the perspective I haven’t seen much of. When I was writing my books, one of the challenges was trying to be exhaustive about the origins of the Xbox and the different people involved — who made what contribution. In your book, your description has to be more brief.
Bach: The broader difference is that you were trying to tell the story of Xbox. That does require an exhaustive view. I’m not actually trying to tell the whole story of Xbox. I’m trying to tell the strategic story of Xbox. Xbox written from the strategy framework perspective, which is the 3P framework I talk about in the book. I am more selective about the topics I bring up and the people I involve, because I’m focused on that strategy piece.
The book is about taking that strategy and applying it to civic issues. I had a number of publishers look at it and say, “No, we just want you to write an Xbox book.” That wasn’t what I wanted to do. I had the luxury of being able to select my material around the subject matter I was focused on.
Above: Original Xbox prototype
Image Credit: Microsoft
GamesBeat: The subject also reflects that you’re interacting mostly with people like J Allard and Rick Thompson, versus people lower down the hierarchy.
Bach: I struggled with that a bit, because I have deep respect for what the team did. I tried to talk about that a lot in a general sense. Of course, if you’re going to be selective, it’s difficult to pick individuals on the team. At that point you want to be exhaustive, because a lot of people deserve a lot of credit. Generally, I tried to keep that focused on great work the team did, though, because ultimately it was the ability to work together that was an important part of our success.
GamesBeat: Did you have any feeling of trying to clear the air on anything?
Bach: Not really. I left Microsoft in a very comfortable place. Steve and I talked about staying for a longer period of time. He wanted me to make a longer commitment. I had decided that I wanted to go do this social impact work. We picked a time that fit where projects were and that was that. I would tell people, I loved every month I was at Microsoft. Maybe not every day, but every month. And then I haven’t missed it.
If there was a sense of clearing the air, I probably wouldn’t have talked about mobile phones or Zune. I don’t think I was afraid to stir up some things where I didn’t get it right. That’s for sure.
GamesBeat: I recall that you either had to sign up for another five years or give up your leadership position.
Bach: Steve and I, we’d been having a sort of “How do you feel about next year?” “I feel good about next year.” “Okay, let’s keep going.” At some point, projects reach a space — 360 was winding down. We were gearing up for the next generation of Xbox. The first version of Windows Phone was getting ready to ship. We were going to enter into a big phase of development on a lot of things. You can’t have a leader who’s there without a longer-term commitment. I understood that. I didn’t feel any pressure. I agreed with Steve on that. It was time to make that decision. I had the opportunity to think about it. My wife and I decided it was the right time to go off and do some new things.
GamesBeat: I noticed there was a figure in there about the losses for the first Xbox. It was $5 billion to $7 billion. I don’t remember if anybody really went back and revisited that.
Bach: If you go back through some of Microsoft’s financial disclosure statements, you can get in that ballpark without too much trouble. It’s a little hard because none of the divisions directly line up with Xbox. That’s part of the reason I used a range. Another part of the reason, you have to decide what costs are allocated to Xbox. We built a whole retail sales force, but that sales force sold Office and Windows too. We built a supply chain that also ended up doing a lot of other things. It’s a bit of an accounting exercise.
The important point isn’t the precision of the number. The point is, it was a big number. It was bigger than what we had forecast. When you’re almost two or four times what you originally forecasted, that’s a big number.
GamesBeat: I can’t get over that it went from that number to a profit of billions in the next generation. It switches from the dumbest thing Microsoft ever did to the smartest thing Microsoft ever did, depending on the time frame in which you look at it.
Bach: You have to understand the nature of the loss. A huge chunk of the loss was in hardware. We designed the original Xbox in a short period of time. We didn’t design it to be cost-effective. We designed it to be sold at a premium to other products. When we realized we couldn’t sell it at a premium, every console we sold cost us money.
One of the principles of the next generation was, that wouldn’t happen again. Once you change that dynamic, and you have the explosive growth we saw in Xbox Live, things change. Also, we were sort of sub-scale at 20-some percent market share. You get to 40-some percent, the scale economies kick in. A lot of good software businesses run at low volumes are not good businesses. You have development costs up front. But run at high volumes, they’re really good businesses.
Above: The Xbox 360 family of consoles
Image Credit: Microsoft
GamesBeat: I never saw the resignation letter that you printed in secret after the first E3.
Bach: I was talking to Rick Belluzzo about that a few months ago. He never showed it to Bill and Steve. I didn’t know that. He may have told them that I was not in a good place, but he never showed them the letter.
When I started writing the book and I was thinking through how to tell the story, I remembered writing that email, but I didn’t remember that I still had it. I think I took out three names, but otherwise that’s the note I wrote to Rick. It’s where I was at the time.
GamesBeat: What do you remember that was most decisive about convincing you to stay?
Bach: For my own part, I felt a very deep sense of obligation to the team and the company. As I say later in the book, the counselors we went to to help us through that period told me that was unnaturally so. So partly it was me saying, “I gotta figure out how to get through this.” But a lot of it was Rick saying, “There are ways you can manage this problem without quitting. There are things you should be doing that you’re not doing, and they can make you a better leader and get you through a difficult situation.”
With some help from him, as well as some help from Anne Francis and Jack Fitzpatrick, the counselors I talk about in the book, and with some help from the rest of the team, we were able to get to the other side.
GamesBeat: It’s a very interesting part of the book. It’s a little more personal and emotional.
Bach: One of the things I’ve learned — if you want to communicate to people and get people to engage in an idea, you have to be able to drive emotion. You have to be able to tell a story in an honest way. Without that part of the story, the challenge of Xbox and Xbox 360 would have been incomplete. People wouldn’t have gotten the gravity of what we were going through.