The Xbox Reloaded

The Xbox Reloaded

The Xbox Reloaded

J Allard is hauling ass downhill on a mountain bike when he sees the hikers. A pair of unsuspecting women strolling through the woods at sunset suddenly find themselves in the path of a mass of titanium, plastic, and taped-together skin and bone barreling toward them at 42 miles per hour. They freeze. Allard grabs the brakes, trying to remember the golden rule of skid management - keep at least 60 percent of the braking pressure on the rear wheel. He slides wide of the hikers only to have his tires lock up in the mud, sending him careening toward a trailside bench. If he hits it, he'll pinwheel over a cliff, into the trees, and back to the emergency room, a place he knows all too well.

Allard, who looks like a sturdier version of REM singer Michael Stipe, slows his bike just enough to squeeze past the bench and avoid the plunge. He leans into a turn and, with a howl, resumes his headlong descent. He makes it to the bottom without sustaining a life-threatening injury, which would have been a shame for a couple of reasons. Aside from Microsoft's losing the leader of its ambitious Xbox initiative, a crash would have deprived Allard of his favorite part of the ride, which he's been taunting his riding partners with all afternoon: the long haul back up the hill. "It's on - like Donkey Kong," Allard says over his shoulder as he starts the steep 500-vertical-foot climb.

Allard is all about uphill climbs. He helped drive Microsoft's entry into the Internet arena in 1994 and, in 1999, persuaded Bill Gates to build a videogame console and take on the powerhouse of the gaming business, Sony. Now, after a six-year ascent, Allard claims he can finally see the crest of the hill.

With the launch of Xbox 360 later this year, Microsoft, hell-bent on getting a jump on Sony, is tossing the original Xbox into the backseat only four years into the traditional five-year console life cycle. Despite Xbox's recent success - it outsold PlayStation 2 domestically for the first time in fourth quarter 2004 - Allard and company are convinced that the time to move is now. From a gaming perspective, Microsoft has the momentum and the clout with developers to beat Sony to what Allard sees as the next era of gaming: hi-def. From a larger viewpoint, Gates and Microsoft CEO Steve Ballmer are counting on Xbox 360 to help the company beat Sony in the war for control of the broadband home.

Microsoft has made no secret of its desire to dominate the living room. Three years ago, it unveiled the Media Center PC operating system, a version of Windows that enables computers to function as TV tuners, DVRs, audio/video jukeboxes and editors, DVD players, and digital photo albums. Microsoft products typically start to function as promised right around version 3.0, and Media Center is no exception. Now that the company has worked out many of the bugs, there's talk that Media Center will be a standard part of Microsoft's next operating system, Longhorn. Which means that soon every PC will have the capabilities of an entire living room entertainment setup and, thanks to VoIP, be able to take care of your telecommunications needs as well.

The hurdle, of course, is to try to get everyday consumers to think of a PC as something other than a productivity tool for the home office. Which is where Xbox 360 comes in. Microsoft sells Media Center Extender boxes that slide into the console stack and connect a TV to a home network, which lets you control the Media Center from as many as five rooms in your house via remote control. The first Xbox supported an Extender add-on, but you had to remove the game you were playing, pop in a disc, and restart. That interruption only reinforced the office versus living room dichotomy for all but the most determined convergence geeks. Xbox 360 has Extender capability built in, giving users an effortless link between all the combined features - games, videoconferences, phone calls, a music library, photos, and all the high-definition video programming stored on Media Center's DVR. All of which makes Xbox 360 more than just the next generation of gaming. It's the latest iteration of Microsoft's infamous "embrace and extend" strategy. Microsoft is spending billions on IPTV technology to try to become the video platform for the post-broadcast future of television. If the company can get consumers to embrace Xbox 360, Microsoft can extend into the entire house.

"This is absolutely one of the most ambitious things our company has ever set out to do," says Ballmer, adding that Allard is "a little crazy."

But Allard insists that his plan is different, because a new era of high-definition gaming is upon us. To him, hi-def is about more than screen resolution. Xbox 360 will introduce gamers to a world where they can create and maintain a persistent, evolving online persona regardless of which game they're playing. A user profile, maintained at a Microsoft data center, will follow you around and track your progress from game to game. That way, if you're a Halo 3 ace, you won't get thrown into a multiplayer Splinter Cell session with a bunch of newbies. The Xbox Live network will also tie into real-world payment systems –la PayPal - so players can buy, make, and sell virtual weapons, car parts, and clothes via micropayments.

If it all sounds like the virtual-meets-real Metaverse that Neal Stephenson described in his 1992 sci-fi novel Snow Crash, it should. Allard is a Stephenson buff, and he requires his crew to read Snow Crash. With Xbox 360, Allard is bringing the Metaverse to the masses.

Microsoft has been hammering away at this vision for more than three years - Allard's team started working on the sequel almost as soon as the original Xbox hit retail shelves in 2001. They've needed every minute of those three years to educate third-party developers on how they can take advantage of Xbox 360's capabilities.

The new product represents a broad rethinking of the console's design and technological innards. Where the original Xbox looks like a bulging land mine of black plastic, the silver and white Xbox 360 seems inspired by Apple designer Jonathan Ive. Under the hood, Xbox 360 is completely reimagined. The first Xbox used customized versions of Intel Pentium IIIs and Nvidia graphics processors. This time, Microsoft aimed higher. Xbox 360 will have a trio of 3.2-GHz core processors operating within a PowerPC-based chip codesigned by Microsoft and IBM. Microsoft has also improved its ability to lure game developers to dream up exclusive games - a huge advantage when it comes to selling consoles. The company has recruited three of Japan's most iconic game designers - Hironobu Sakaguchi (Final Fantasy), Yoshiki Okamotu (Resident Evil), and Tetsuyu Mizuguchi (Lumines) to create games exclusively for Xbox 360.

Meanwhile, Sony is floundering. At the annual Game Developers Conference in San Francisco earlier this year, attendees grumbled that Sony hadn't sent out enough PlayStation 3 developer kits, the guidelines that game creators need so they can tailor their products to a particular console. Developers typically make do with an 18-month cycle, so Sony can still have PS3 ready for the 2006 holiday season. But that time frame will become a lot tighter if gamers and developers start expecting games to appear lifelike on hi-def displays. (To make sure that everyone left the conference with HD on their minds, Microsoft gave away 1,000 flat-screen HDTVs at the end of Allard's keynote.) Sony is also facing turmoil at the top. In March, the company ousted its CEO and named its first non-Japanese leader in history. And a few weeks later, a California appellate judge upheld an earlier verdict that Sony's vibrating PS2 controllers infringed on another company's patents. Sony was ordered to cough up $90 million in damages.

So while the sales scoreboard tells one story - 80 million PS2s sold, versus 20 million Xboxes - momentum seems to be shifting. The decision to cut short Xbox's life cycle could turn out to be as deft a bit of steering as Allard's display of extreme mountain biking.

Allard landed his first job at Microsoft in 1991, after scoring moxie points for showing up as the lone Caucasian at an MIT minority job fair. But he never thought of himself as a lowly Microserf. In January 1994, Allard, then 25, banged out a memo titled "Windows: The Next Killer Application on the Internet," in which he coined the infamous embrace and extend mantra. Bill Gates pored over Allard's brash memo during Think Week, his semiannual one-man retreat at a secret cabin in the Washington hinterlands, and during the next year Gates formulated the Netscape-crushing strategy outlined in his own paper, "The Internet Tidal Wave."

Allard is not exactly your typical Microsoft employee. Spend a bit of time with the man and you begin to see him as a wag on the loose inside the Microsoft campus, saying and doing his own thing regardless of whether it jibes with corporate strategy. He uses an Apple PowerBook, fires off rambling, profanity-laced emails to his superiors, and has a knack for, well, thinking different. He also has the respect of Gates and Ballmer.

So when Allard cooked up another unlikely proposal in 1999, his bosses paid attention. Ballmer remembers thinking that Allard's proposal was over-the-top. "Bill called me up and said, 'Let's get this thing fired up.' I said, 'Um, this is pretty different, pretty bold.' Actually, 'wacky' was probably more like it," Ballmer remembers. "I didn't say, 'Stop,' but I pushed back pretty hard. There's no way to muscle in on guys like Sony and Nintendo using just sheer resources."

On Valentine's Day 2000, Ballmer and Gates sat down with Allard and the heads of a handful of other Microsoft divisions for an all-day meeting to decide whether to make the $2 billion commitment required to get Xbox off the ground. Allard sketched out a road map in an email he sent around on the morning of the meeting:

Year 1: Xbox is viewed as the leader in online gaming and a credible contender in the next-generation console battle. we establish momentum around multiplayer gaming, saved game roaming, and "organic" titles (e.g., using the internet to extend games beyond their shrink-wrapped experience) …

Year 2: Xbox titles look better than playStation 2 titles as isvs have more time with the graphics part and the overall system. we enhance the system to offer voice chat for multiplayers to further extend our networking leadership … dolphin [Nintendo GameCube] becomes a niche product (toy) and is not covered in the serious gaming magazines. It's a 2 horse race …

Year 3: Xbox sells more units than playStation 2 in this calendar year …

And so it happened. In the space of 21 months, Microsoft went from being a software company to fielding a serviceable console with eye-popping graphics and the most advanced online gaming capabilities. Nintendo has sold more than 18 million GameCubes but has since faded, leaving a two-horse race.

Everyone at the meeting agreed that initially Xbox wouldn't make a dime. In the first year, the console retailed for $300 and Microsoft lost as much as $125 on each unit sold. "Yeah. We took it in the shorts," Allard says. "The first time around was just a bath. A lesson. Practice."

Given PS2's head start, Microsoft had a hard time persuading game developers to create Xbox games. At the 2001 E3 conference, the game press panned Xbox's flagship title, Halo. "They called it a crappy port of a PC game," Allard recalls. "I just told my team to stick to the plan." In the end, Halo became the best-selling Xbox title in the console's first holiday season and gained a huge following.

Then came Halo 2. Microsoft gave its in-house studio, Bungie, a Hollywood-size production and marketing budget for the sequel. Elaborate teasers ran alongside movie trailers, and Bungie's preview at E3 in May 2004 wowed members of the game industry press. Last November, fans lined up around the block to pay their $50. When the stampede was over, the title had posted a bigger opening day - $125 million - than Hollywood's biggest-ever three-day opening weekend ($114 million for Spider-Man). As it turned out, Halo 2 lived up to its hype. Perhaps most important, it took full advantage of the Xbox's online capabilities, allowing players to trash-talk long distance in real time. In its third year, the Xbox division turned its first profit during what Ballmer refers to it as "the Halo 2 quarter."

Xbox had come of age.

In January, Allard and the rest of the Xbox senior executives gathered to write brief statements on what motivates them to come to work every morning. The mission: to inspire the group's rank and file. "Most people put down flowery, make-the-world-a-better-place, Miss America types of things," Allard says. "I wrote: What gets me out of bed and into the office every day is the thought of Ken Kutaragi's resignation letter, framed, hanging next to my desk."

A few months later, Allard is having lunch on the outdoor deck of the Ramp on San Francisco's waterfront when his phone starts buzzing. He runs out to the parking lot to make a few frantic calls to try to verify the text message he just received: Kutaragi, the creator of the PlayStation and the preeminent figure in modern console gaming, has been demoted from his position as head of Sony's Game Business Group. Then it hits him - it's an early April Fools' joke. Certain that his boss, Microsoft's senior vice president of home and entertainment, Robbie Bach, is getting revenge for a prank Allard pulled last April (he convinced Bach he was taking a sabbatical to be an executive producer on The Apprentice), Allard returns to the table and demands to know if I'm in on the ruse. But it's no joke. Kutaragi is out.

So now what will drive Allard to go to work in the morning? At this year's Think Week, Gates spent a lot of time reading Allard's 147-page "Book of Xenon," the Snow Crash-infused plan for the Xbox platform's next 20 years. No doubt Gates likes to dabble in a videogame or two on his slow days, but as far as he and Ballmer are concerned, the best thing about Xbox 360 may be its potential to boost sales of Windows Media Center systems. It's clear that Microsoft expects the launch of Xbox 360 to be a watershed event for the Media Center. With all the new capabilities, Xbox 360 could eat the rest of the standard living room components one by one, like a piranha in a goldfish tank: first taking over for the DVD player, then the stereo, then the TiVo …

I ask Allard whether his book-sized memo outlines a broader strategy featuring Xbox 360 as a Trojan horse that sneaks Windows into the living room entertainment stack. It seems like a reasonable question. At $150 each, PS2 and Xbox are already cheap ways to kill two home-entertainment must-haves with one stone. But Allard recoils at the very suggestion. He looks like he's about to curse, but then composes himself enough to answer my query. "If there's a serious gamer out there who doesn't get an Xbox console because a mom who wants to watch DVDs grabbed the last one, then we've failed," he says.

It's not that he's worried about diluting the console's purpose. He just doesn't want to lose focus. He believes that for the Xbox platform to thrive, it must first trounce Sony in the gaming space. That means getting the hardcore gamers on board. "If we can get the first couple million Xbox 360s into the hands of the serious gamers, we can get to 10 million first," he says. "And the first guy to sell 10 million units wins."

For Allard, Xbox 360 is all about gaming. For Microsoft, it's about gaming - and a whole lot more. The big picture isn't 10 million hardcore gamers trash-talking one another over a massively multiplayer version of Halo 3. It's 100 million Middle Americans using Xbox 360 as the linchpin of their Windows-powered digital home.

Josh McHugh ( is a Wired contributing editor.
credit photograph by Trevor Graves
Allard, Microsoftés head of Xbox development, with Xbox 360.

credit David Clugston