LAS VEGAS — Robbie Bach, president of Microsoft’s Entertainment and Devices Division, talked about layoffs (“you won’t hear us comment”), the great 2008 for Xbox and its impact on profitability, Microsoft’s deal with Verizon Wireless (creating a good mobile search experience is the key), where entertainment fits in Microsoft’s mobile strategy and more. Read on for a condensed transcript of my conversation with him Wednesday afternoon.
Q: I get asked nearly every day now being in Seattle, what’s the layoff picture look like? Is Microsoft planning layoffs?
Bach: You won’t hear us comment about it. We do what every company is doing, which is looking at our resources and trying to manage them effectively and do the right balance between the short-term challenge in the economy, and what we think is a long-term opportunity for the company. And I think that’s about all you’re going to hear us say.
Q: You just announced that 2008 was the best year on record for the Xbox business. How do you see that translating to profitability for your division and what levers are there left to pull to increase profit from that business in 2009?
Bach: Certainly, if you look at the long-term financial health of the division, increasing the install base of consoles is probably the best thing we can do because over time those people buy games, they get Xbox Live subscriptions, they download things on Xbox Live, they buy extra peripherals, etc.
So, in the medium- to long-term it’s a very, very positive thing. In the immediate short term, it’s just a question of how fast people buy games, and how that plays out over the fiscal year.
The reality is, my guess is attach rate on games when people buy consoles probably is going to slow down, and we did see a little bit of that in the holiday season where people, last year, if they were buying five games when they bought a console, maybe this year they only bought four. And if they got two controllers when they bought a console, maybe they only got one extra controller this year. So you’ve seen a little bit of that and that will have some impact on us.
Q: As Xbox Live’s subscriptions and downloadable video content sales continue to grow, does that lend itself to a better profit margin from that particular part of the business?
Bach: The [way the] business basically breaks out, you know, [is] the base console is neither plus nor minus on the economics. But the software and Xbox Live and the peripherals business all can be good businesses. They’re all a little bit different.
Peripherals have physical [cost of goods sold] in it. Software has some cost in it. Xbox Live has operating costs because you’ve got to run the network. So they each have their own sort of [profit and loss] profile, but all three of those can be good parts of the business.
Q: As you’ve assembled an audience of now 17 million subscribers on Xbox Live, how has that changed negotiations with the content producers?
Bach: If you talk to game publishers, they’ve been very supportive all along. Xbox Live is a good business for them. When they sell downloads and value-ad packs and things like that, it’s very positive for them.
Xbox Live also means that when two people want to play against each other they both have to own the game, so we actually believe Live-enabled games just sell better period. …
If you then go to the people in the movie industry, TV industry, initially I think they would have said, “Well, it’s kind of an interesting audience. Nice demographic but relatively small.”
Now it’s larger and that’s why you see us able to do a deal like the Netflix deal. That works really well for both us and for Netflix, and gets them engaged with a great audience. I think you’re going to see that continue.
Q: Is the Netflix arrangement — in which Gold-level subscribers to Xbox Live who also use Netflix can watch 12,000 Netflix titles on demand over the network — much of a revenue-positive deal for Microsoft, other than driving people toward the Gold subscription?
Bach: One, certainly it drives Gold subscriptions, which is a good thing. More importantly is that it drives a broader audience. The number of people who have said to me, “I was able to convince my spouse that, ‘Hey we need an Xbox because now we can get Netflix direct.’ ”
It’s a very cool selling point from a broaden-the-audience perspective. I do think it’s more than just the incremental Gold subscribers. I think it makes Xbox more attractive to a broader range of people.
Q: The Verizon deal [announced Wednesday] to put Live services on Verizon Wireless phones appears to be a big and expensive win. The Wall Street Journal reported Microsoft offered revenue guarantees of $550 million to $650 million over five years. Was that number in the ballpark?
Bach: Neither us nor Verizon [is] going to comment on the number.
All these deals have economics, so I’m not going to say that there’s not economics involved because of course there is, but the logic behind the deal for us is: The mobile search and advertising business … we think [is] a large opportunity and it’s very early in the process of defining what it is. And the opportunity to work with somebody like Verizon to create a great experience for advertisers and for consumers in that space is super-important to us and it was to Verizon as well.
This is one of the things that’s a mutual deal and if you talk to the Verizon folks, they will tell you, “Hey, we have tons of people who want to do search on the phone, but nobody’s done a great search experience on the phone.” And that’s the task that we’re both taking on together and I think it’s got a great chance for success.
Q: Can you talk more about your expectations about the future of mobile ads because, again, speaking to the economics, some analysts have questioned whether this is a deal that you can break even on over the scope as its been described.
Bach: I think the way you have to think about it, if you asked me to do a very precise granular spreadsheet — we can produce a spreadsheet, I’m sure, and have — but the distribution around what the outcome will be is actually pretty large, because I think it’s fairly uncertain. What I think is certain is that people are going to want those kinds of experiences on a mobile phone. The challenge — and what will determine our success, to me — isn’t necessarily the underlying economics, per se, but it’s do we find the right experience for people for search on a mobile phone?
Because if you just said, “Oh gosh, let’s translate some little links … take the PC experience and move it to a mobile search experience,” you’re not going to be successful. The device is different, the customer context is different. You actually have more context in the phone case than you do in the desktop case. People are looking and searching for different things, so the experience needs to be different and that’s the secret to success.
So anybody who’s sort of predicting can they be successful … is maybe looking at the economics, but really has to be forecasting how successful are they going to be at creating a good experience. I think that’s the big question and that’s our job.
Q: A lot of attention in the mobile phone space this year has gone to the Apple and Google, meanwhile, it’s seemed pretty quiet from Windows Mobile. Is Microsoft risking losing any mindshare during what seems to be a bit of a lull?
Bach: We actually had a very good year. … [W]e shipped 11 phones that have done over 1 million units each. We did 18 million plus phones in our last fiscal year. Obviously we continue to see growth in that number this year so we feel very good about where that business is going.
Part of the reason why you don’t hear about it quite as much is because our model and approach is very different from Apple and RIM [Research in Motion, maker of the BlackBerry], in particular.
In their case they have a small number of handsets. It’s their handset, it’s a vertical ecosystem. In our case, we’re about choice. We believe that people are going to want a lot of different types of phones, that everybody wants to use a phone a little bit differently. So sometimes it makes the marketing part of what we do actually a little bit harder, because people don’t see the accumulation of what we do, but we’ve actually had a very good year and I think 2009 is going to continue to be a good year.
We’ve got some very nice work that we’re incorporating in the browser. I think you’re going to see some great devices this year and you’re going to continue to see strength from us.
Q: How would you sell Windows Mobile to a consumer who’s looking at a Windows Mobile device and an iPhone or GPhone?
Bach: I’d say, “What do you want to do with your phone? If you’re going to text, if you’re going to do e-mail, if you want to browse, I think our phone is as good or better than anything else on the marketplace.” If you said, ‘”Well, my primary focus is music.” Likelihood, you’d probably say, “Get an iPod, get a Zune, get an iPhone,” just because that’s more where they focused their attention.
But this device [Bach was carrying a Samsung BlackJack II], it’s awesome for text, it’s awesome for e-mail, it’s got a really nice browsing environment in it. It’s a very slim, nice looking device. And that’s the way I would talk to people about it.
And I think the idea that you can connect a Windows PC, with your Windows phone, with Windows Live Services, is a very powerful idea, and you’ll hear Steve talk about that tonight.
Q: On that music piece, that’s certainly what a lot of consumers are looking for —
Bach: Not so much in the phone market. They may be looking for music, but not quite as much in the phone market.
Q: OK, well there was this Zune phone rumor that got debunked.
Bach: I knew you were headed there!
Q: But where does music and that kind of entertainment fit into the mobile strategy for Microsoft?
Bach: That’s a good question. I think in the short-term certainly, you see MP3-type players and portable media devices being a good market. Zune continues to grow. We passed 3 million devices. Over 2 million people on Zune Social. We’re winning reviews with the product so we feel good about the progress we’re making.
In the medium- to longer-term, I do think the phone will play a much more central role in that case. … There are some limitations today. Battery life is actually a pretty big problem, in particular if you’re going to do video or music.
But I do think over time you’re going to see more of that shift, and you’re going to see people who will look at a phone and say, “Hey, I want a phone that focuses more on text and e-mail and those type of things” and there will be some people who say, “I want a phone that will focus more on music and video in addition to being great as a phone.”
That’s why our choice model works so effectively, because we can certainly produce those phones. We can certainly produce the operating system software and the services that go along with it. And at the same time, if you want to have high-security Exchange e-mail for your enterprise and you want to be able to have it on all your worker’s phones. We’re the best in the world at that.
So, that’s our job. Our job is to expand the business from being great on the productivity and business side into the broader consumer space, and I think as people move that direction, we’ll move with them.
Q: Between the Zune New Year’s Eve hiccup and the Xbox 360 issue, do you have any feeling that you need to make a case again for the quality of Microsoft’s entertainment hardware products?
Bach: No. Look, the Zune thing is certainly unfortunate. Not something we like. It was of a very different nature.
The Xbox issue was what I’ll call a very deep technical, complex interaction of forces in a device that is a very high-end, complex device. In the Zune case, this was a software bug. It was in one device. It was probably something we should have found. It was something we did find in all the other devices, because it doesn’t exist in any of the other devices. And all we can do and what should do is focus on making sure customers get back to their Zunes working great and thankfully that happened the next day.
Q: You’re starting as chairman of the Boys & Girls Clubs of America, but you’ve been involved with the group for a while.
Bach: I’ve been a local board member in Bellevue for almost 10 years.
Q: Have you gained any insights working with kids or an organization serving kids that has helped you as you’re looking at entertainment products that younger people are consuming?
Bach: I think there’s two types of things that I’ve learned from it that apply to business. Certainly, I’ve learned a lot about life from it, which is really the fulfilling part. But there’s two types of things you learn from a business perspective.
One, interacting with the people on the board is amazing. It’s a very distinguished board, a very smart set of people. And, you know, Boys & Girls Clubs of America is a large organization, and it’s reasonably complex to manage and run. So just listening to people talk about management ideas, and how will we make it work and how you work through the challenging economic times for charitable organizations, that to me, from a business perspective, has been valuable and hopefully I’ve been able to contribute my two cents into that process with them.
On the kids side, what you do see is the amazing … capacity of kids. When you go into a club and you see kids, some of whom come from families who have good economic situations, some come from economic situations that aren’t very good, but when you give them an opportunity and put something in front of them, they take it and it’s amazing to watch what they do.’
It sort of comes back to sometimes you think, “Well, gosh, we’re working with kids, here. We need to be basic.” But in fact, I’ll tell you that in most of what I do, we can do the most advanced things we do with kids and the least advanced things with people my age.
As an example, tonight on stage, I’ll be on stage with a 12-year-old girl, who’s been creating games from a product we call Kodu, and she’ll be smarter technically than I am. Not because she’s done any class or any training, but she can do things I can’t do. That to me is humbling, but quite fun.