ED WILLIAMS: All right, I think we'll go ahead and resume the presentations again. Up next we have Microsoft, and with us from Microsoft is Robbie Bach, who is the Senior Vice President and Chief Xbox® Officer for Microsoft® Home & Entertainment. So, Robbie, why don't you go ahead and get us started.

ROBBIE BACH: Good afternoon and welcome back after lunch. I have the illustrious duty of getting everybody reinvigorated after the lunch break.

It's good to be back at the conference. I wasn't able to be here last year, so it's exciting to come and talk a little bit about the Xbox business.

I'm going to start by talking a little bit about where we finished our fiscal year, so this is data as of June 2003, and sort of give you a little bit of a background about the Xbox business, and then I'll talk about the coming year and some strategy points to kind of give you a sense for where the business is.

Through the end of June we shipped about 9.4 million consoles worldwide. About 6.2 of that are in North America, 2.2 in Europe, and about a million units in Asia Pacific. We think that really demonstrates broad, strong momentum and has put us certainly in the number two spot in the North American and European market.

Probably more importantly, through the end of our fiscal year we had about 250 games on the platform. That number is continuing to increase, and I would actually say accelerate, as third-party publishers have realized the good business they can do on Xbox. And so we're seeing more titles come our way, and as you'll see in a moment a broader portfolio of games that really will pay off people's purchase of an Xbox because they'll be able to get whatever style of game they want on the platform.

In addition, during the past fiscal year we launched Xbox in six new countries and we launched Xbox Live™, our online gaming service, in 11 countries. I'll talk a little later about Xbox Live in more detail, but just to bring you up to date, we are now at 19 countries for Xbox Live. We just launched six new countries in Europe plus Korea and Australia, all in the last four weeks, and all of those launches are going quite well.

Our subscriber numbers for Xbox Live are about 500,000 paid subscribers at the end of June. Again, I'll talk in a minute about where we're going for the year, but that business is quite healthy. In particular, as you look to the content we have coming this holiday, we'll have over 50 titles on Xbox Live, and it is the content that drives this service. And when people can play great games against other people it completely changes the gaming experience and leads to a lot of excitement.

Another very important number to look at is our attach rate. And if you look at the end of June, we were at 5.4 games per console sold. If you think about that in the context of being in the market in the United States for 18 months, that is the highest attach rate number in that period of time any console has ever done and, in fact, that number continues to grow.

Through the end of September in the U.S., our attach rate was up to 5.9 and that does not include games that have been bundled with the system. If you include games that have been bundled with the system, the attach rate would be about 6.3. And that's really a phenomenal number, and it really shows again the excitement people have playing games on Xbox. I think Xbox Live has added to that because I think it's brought new people into the marketplace, and I think you'll see that continue to accelerate this holiday.

And finally, on the first party business, because we do obviously publish games on Xbox, two years ago we had no franchises that were console franchises and, in fact, Microsoft had never done a console game. Now here 18 months into the cycle Halo® is an established franchise, Halo II is probably the most anticipated game, upcoming game after this holiday. MechAssault™ was a huge success on Xbox Live, Brute Force™ again very successful, and we'll see in a minutes some great first party titles for holiday. So we feel like our first party business is continuing to do well as well.

Now, when you think about our fiscal year 2004, which goes through June, there are a couple of priorities to focus on: obviously the platform driving Xbox games, and you'll see the lineup in a moment. I think we have the strongest lineup over the next 12 months of any platform. We're very excited about the support we're getting from our publishing partners as well as from our internal studios.

Xbox Live continues to expand and innovate. We just brought in a capability called Live Now, which I'll talk about later, but it basically enables you to meet friends online outside of games, chat, decide what games you want to play, and then go play games. And the whole idea of voice and chat is very powerful and very exciting.

Cost reduction on the hardware side, that goes without saying. That's sort of the lifeblood of how you run the business, and we continue to do that work.

I said 250 games by June. By the end of this holiday, we'll have about 400 games on the platform. At this stage it's not the number of games that I'm proud of; it's really the quality of games this holiday, and I think we've got some great titles.

Our forecast for the fiscal year, we think our shipment numbers life-to-date will be at 14.5 to 16 million by June of 2004, so that shows some very nice growth off the 9.4 number. We're certainly through our first quarter and through the early parts of the holiday; we’re on track to achieve that number. Business continues on the pace it's been, which has been very nice.

For Xbox Live we're forecasting going from the 500,000 number of subscribers you saw in June 2003 to over a million subscribers, again showing pretty dramatic growth in a place where it's something new. Building a subscription service in the online space on a console is a completely new effort, and we're quite excited about the momentum we've seen.

So that tells you where Xbox is as a product. I want to step back a little bit and talk about Microsoft's approach to the business because one of the common questions I get asked is some combination of, "Why are you in the business," that is quickly followed by, "And is Xbox the center of Microsoft's home strategy."

And I want to step back. At Microsoft, I run what's called the Consumer Leadership Team, which is a collection of the senior leaders from all the consumer businesses. And I want to communicate a little bit about the consumer strategy before we talk about Xbox specifically.

And to answer the question squarely, Xbox isn't at the center of what we do in the home. Xbox is critical and vital to what we do in the home, but at the center of the home, we believe is a Windows® computer, a Media Center computer, because at that center you want a place to store all your digital assets. You want to be able to put your photos, your music, your video, and your television recordings. You want something to manage the network and your multiple Internet connections. You want that central, multipurpose workhorse that, by the way, can also do a lot of productivity things as well, at the center of what you do in the home. Xbox then becomes the device that connects around that to provide great videogame entertainment.

So Windows is at the core of what we do and around that, Microsoft sees in the consumer space a set of connected devices. It's quite clear to us that over the next five years wireless networking will be very pervasive in the home. We're already seeing a lot of growth in that marketplace. Prices have come down. The technology is improving. Installation is easier and people are seeing the benefits of simple things, like being able to get to a printer, and the more exciting benefits of having multiple people on the Internet gaming against each other and communications.

So we think the home is fundamentally a networked environment with a Windows computer at the center and a series of devices connected to that Windows computer. Now, one of those devices could be a Tablet PC, it could be a Pocket PC, it could be printers, or other intelligent devices. And certainly one of the important ones for us is Xbox because of its role in the videogame space and how central videogames and interactive entertainment is to what people do in the home.

And then the final circle of this strategy really says, “Okay, so I've got Windows at the center that's managing things and I've got the devices.” Then the last consideration is the applications and services on top of those devices; what are people doing. Well, whether it's video editing, photo editing, whether it's working on a multiplayer game on the computer or on Xbox, whatever it is there's a set of applications and services that play on those devices.

And this integrated approach about the home to us really enables you to deliver what we think of as end-to-end scenarios. So how do I think about taking a picture, storing it someplace, displaying it in a place that I want to display it, and sharing it with friends all as one integrated scenario? And if you don't have sort of a full picture of our strategy in that space, it's hard to see how that's going to happen.

Likewise, in the videogame space, how does Xbox Live and Xbox on a TV in the bedroom, how does that connection work, how do we make that work, and how do we integrate that into the whole experience people have in the home?

So that gives you some context for what's happening in our strategy on the consumer space. And then the other thing that's happening is there's a huge change in the marketplace. The way people communicate, the way people experience entertainment, the way people live in the non-work part of their life is increasingly becoming digitized, and we call this the Digital Lifestyle, which is just a fancy name for saying that if you think about your world, a lot of it is now digital. Your music is digital, your photos are digital, TV can be stored digitally. All those things are happening, and you see all these devices that are growing up in phenomenal numbers, whether that's cameras, cell phones, or videogame consoles like Xbox, all the way up to Internet-connected computers.

And that world from a consumer experience is a very different world. I watch my son do homework at night, and I think he's doing homework, I hope he is, but he's also got chat sessions, he's talking on the phone, he might be playing a game on the computer or an Xbox—they do all that at once. And consumers and people in this marketplace increasingly think of this as, “It’s just my stuff, and it's digital. And I want to be able to access it wherever I want to have it.”

Xbox and the work we do in the videogame space plays a very central role in Microsoft's approach to that Digital Lifestyle because interactive entertainment, digital entertainment, and the way music, videogames, movies, and TV are going to converge from an experience perspective is very important for us to deliver. The hardware and the devices probably will remain separate, but the experience and the way people think about those experiences really is starting to converge.

So let me talk a little bit about that and talk specifically about how we think about Xbox in that space.

We think of Xbox as the catalyst for that social form of entertainment, for the interaction that takes place when people are playing a game, for the community that gets built when people are in a multiplayer game on Xbox Live with a headset talking to each other. We think Xbox can play a major role over the next five to ten years in taking advantage of this market trend and, in fact, catalyzing this market trend.

And I'm going to talk about that in three areas. I'm going to talk about content, because that's obviously central to what we have to do in this space; I'm going to talk about community, and why we think community is so powerful as a way for the industry to grow; and I'm going to talk about expanding competition, which is in many ways a specific case of the community point because it's a certain type of fairly-aggressive community that is particularly exciting in the interactive entertainment space.

So in terms of expanding the content, you're really seeing two things happen on Xbox. First of all, we continue to feed the triple-A content that the core gaming audience is looking for. This is just a selection and by far not a complete selection, I will point out, of the great titles that will be on Xbox this holiday or shortly thereafter, and it is by far the strongest lineup we've ever had.

I look at this and say, “Wow, regardless of what genre you're in, regardless of what your play style is, regardless of what you're looking for, there is a triple-A set of content for you on Xbox.”

And I think the early reviews on these games are very strong. The early feedback from retailers on the titles that are already in the market is quite strong, and we think that's going to lead to a lot of momentum around the platform for holiday.

In the end, we're in the part of the cycle that is about the content. Live is important, the platform is important, all those things are important, but in the end this is about content—and this holiday and certainly next holiday are all about making sure great games get sold on the platform, and we think we have the titles certainly for that core audience.

Now, if I go one step further, one of the challenges in Xbox has been a little bit of a perception that we were just about the core audience, a little bit of an edgy brand, sort of about power, a lot about core games, if you want to think about it that way. But we are increasingly expanding that content to really broaden the audience, whether that be what you think of as traditional toy properties, like Barbie, as TV properties, like Scooby Doo and Spongebob, as movie properties, like Harry Potter, or as things in other genres, like Music Mixer or (Dance Dance Revolution), which are really more music forms of entertainment as opposed to strictly videogames.

This breadth of content I could not have showed you a year ago and, in fact, in many ways wasn't what we were looking for a year ago because a year ago, we were looking at credibility in the core gaming market. We feel like we have that today. Now we're about expanding the brand, expanding the audience, and building the install base of enthusiastic followers for Xbox. Because we're in this business for the long term, it's very important for us to continue to expand and grow into other areas.

So what you really have in our content area is the great games for core gamers and an expanded line of content for the broader family, children, and general entertainment people, and we think that's going to be a key to our success over the next 12 months.

The second thing I said I was going to talk about was expanding community and this is principally around Xbox Live. Xbox Live is the largest broadband content service on a subscription basis in the world. We now are in 19 countries. Actually the visual image needs to be updated to include Australia and Korea, which just launched.

We feel like we're 15 million game sessions a week and this is the game sessions that are happening at peak times. This is that primetime on TV. It's 7:00 at night to 11:00 at night. And so some of the things we compete with are television and other forms of entertainment, but because this is interactive, because it's community-based, and because you're reaching to people who want to spend time with their friends—not just sitting in front of the television but really interacting and having a social experience—Xbox Live is very powerful. It's a very Gen-Y type of experience where they are perhaps one of the most social generations that have come along in a while.

I talked about more than 50 games by holiday, more than 100 games on Xbox Live by next June.

The community features you see here—voice communications, having a single name, being able to meet your friends online, being able to get information on a Web site about your rankings and where you are—all of this is backed by a great lineup of content, and again this is just a selection of content. There's many more titles that we think will do well this holiday.

So expanding that community becomes very important, especially as you think about the future. Because if you think about someday in the future, there will be a generation migration here from this generation of consoles to the next generation, and building a community of people on Live who are dedicated and focused on Life is a very important thing for us in terms of how we think about continuing our success into future generations.

Finally, I want to talk about expanding competition because inevitably in games you're playing against someone or you're playing with someone, but you're in a competitive environment. So one of the things we've tried to do is figure out ways to bring possibilities to the competitive space.

So in the sports area we've launched something called XSN Sports, which is with our sports products that enables you to create your own league, enables you to create your own tournaments, keep statistics, form clans, do all the types of things that you want to do to create community in the context of competition.

Think of why fantasy leagues are so big in the NFL. Part of the reason they're so big is because you call up and talk to each other, you razz people about you're doing and how they're doing, you have a competition against each other—and it's a friendly competition but it is a form of community that is very powerful and really does attract people.

XSN, just as a specific example, will be in these six titles, all of which are launching this holiday, and we've seen the early results on NFL Fever very powerful. I think Top Spin™ is a title that's going to surprise people. It's getting great reviews, being favorably compared to Virtua Tennis. It has XSN Sports in it, so people are starting to create their own leagues and tournaments in that sphere.

I think this is a broader trend where effectively gamers become the people managing the community, and they create their own community and their own forms of competition.

So expanding on what we're doing in content, building a broad base of content that covers all the genres and all the target audiences; expanding what we're doing in community, and building a lifeblood of dedicated people who really love to be on Xbox and Xbox Live; and figuring out how competition in that community environment can really drive the business forward are really sort of three key pillars for how we think about the business.

Now, there is one other aspect of that that goes with it. I mentioned earlier that we have a reputation of being a little bit more edgy, a little bit more hard core as a brand. We've done phenomenally well building the Xbox brand from scratch. Awareness is in the high nineties on very positive attributes, but a little bit more focused perceptually in the core audience.

And what we are now doing consciously as a brand strategy, again thinking about the future and our desire to continue to grow the business, is broadening that brand strategy.

And we think of that in the context of what I said earlier about social gaming. If Nintendo is about kids' entertainment and Sony is about the escapism of "Live in your world, play in our world," Xbox is about the social experience of having fun with your friends and playing games, whether that's in a competition, whether that's two people in the same room, or whether that's two people playing across continents on an Xbox Live connection.

And we think that that social aspect is a very powerful part of what is going to drive the industry, and we think our console is uniquely positioned to take advantage of that.

Now, the specific implementations you'll see of that come across in some of the brand work we're doing. You'll see in our new ads, which I'm going to show in a moment, a tagline called "It's Good to Play Together." And the whole idea here is to really reinforce the fact that there's a human element to videogames. It's not just about the games themselves; it's about the fun you have when you're interacting with those games and the fun you have with your friends. And while the taglines change, the concept of social gaming we think is super powerful and will be at the center of a lot of the work we do over the coming months and years.

So what I'm going to show you now is three of the ads that will be appearing this holiday. The first is for Grabbed by the Ghoulies, which is the first title from Rare, which is actually a very young title. This will SKU in the audience 8 to 14. It's very fun, but you'll see it's very playful and very much in that audience. The second title is Amped® 2, which is a snowboarding game, which we're very excited about. Amped did very well at the launch of Xbox. And the final title is Project Gotham Racing® 2, which is our premier racing product, sold a million and a half units in the first iteration. We think the second iteration with a great Live implementation is going to be very powerful.

So I'm just going to roll these consecutively and let's just go through them, and you'll see a little bit how the ad and brand concepts come through, as well as getting a chance to see some products.

(Video segment.)

So what you see there is the combination of great game highlights and showing people the fabulous game play, but at the same time, it shows people the experience and the fun that people are having together and the idea that social gaming is what Xbox is all about.

And we have the fact that P. Diddy is doing our voice overs to keep the ads at an edgy space so that we don't lose the core gaming audience, and that's why you see all the great game footage as well in the advertisements.

So really this is an evolutionary process. It's a process of building a brand that we think can be powerful for the next 10 or 20 years and positioning it well now for the future of what we can offer on Xbox.

Finally, I'd be remiss if I didn't talk just briefly about the holiday. Certainly with the title lineup we have we feel very good about the holiday program. We think the games we have are going to sell the console. They're going to create a lot of excitement in the marketplace. We've added to that a special holiday offer. For $179 you get an Xbox console, Star Wars Clone Wars, Tetris Worlds Live, and two months Xbox Live trial.

Now, if you're in the core gaming audience you might look at that and say, "Well, Tetris Worlds, Star Wars Clone Wars, those are nice titles, they weren't on my list of triple-A titles for the hardcore gamers," and that's true, but you have to understand that this bundle is targeted again at broadening the audience. We want to reach out to moms who are buying at Target or at Wal-Mart, in addition to the people who are buying at EB, GameStop, and other stores.

And so this is a great broadening purchase wherever you're going to buy, and it helps us reach into an audience that we haven't been as successful with as we would like because Star Wars is a safe brand—it's a brand everybody knows—likewise with Tetris—it's a safe brand that everybody knows—and for our third-party publishers, they don't see these titles as titles that compete with what they do, so they are still able to make the good progress of selling their titles into the console after the bundle is sold.

Likewise, having two months of free Xbox Live is a tremendous trial vehicle. If you've ever tried Live or if we get people to try Live, they love playing on the service and it absolutely leads to adoption. And so this will come both with a console as well as with all Live titles that ship this holiday. You will get two months free and we hope to have a good conversion rate on top of that.

So this really is about building on franchise, building and broadening the audience, and expanding what we do in Xbox Live. We think it will position us very well in complementary nature with the great game content we have for the holiday.

So if I wrap up and summarize there, Microsoft has a very coordinated and thought-through strategy in the home and consumer space. We believe that that is a world in which the home ultimately is networked, mostly wireless; in which devices, applications, and services play on top of those devices on the network; and a world in which Xbox plays a critical role in the interactive entertainment space, Windows obviously in the operating system space, MSN® in what we do in the online space, and we have that longer-term vision.

In the more immediate term, Xbox itself is doing quite well. The business continues to be strong. We're very excited about the prospects for the holiday. We're thankful for the great support we get from our publishers because they really are the groups that make the box go and really are producing the titles that are making things go. And we think the upside in opportunity for Xbox Live and the things we're doing with the brand really will help us build a great business over time.

Thanks very much. (Applause.)

END

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