Xbox Revisited Excerpt: Behind the scenes of Xbox 360's development

The following excerpt from Robbie Bach's 2015 book Xbox Revisited is reprinted with permission from Brown Books Publishing Group. The book itself lays out some of Bach's experiences and lessons learned while leading Microsoft's Xbox division through the launch of the original Xbox and the Xbox 360, which he also spoke to in this interview with Gamasutra.

As the Xbox 360 turns 10 this weekend, we thought it might be apropos to excerpt this passage about how the console was inititally conceived and developed (as "Project Xenon") in the wake of the original Xbox's underwhelming market performance.

While it's couched as an example of good business planning, it also offers an interesting look behind the scenes of Microsoft's Xbox 360 market strategy and how the company consciously shifted away from "speeds-and-feeds" marketing in favor of selling people on the idea of a game console being central to the living room.

In many respects, the original Xbox work was a rehearsal and training ground for developing a strong set of priorities for Xenon. The team gained valuable market experience, learned a number of difficult and expensive lessons, and developed its own sense of what mattered to our partners and customers. This on-the-job training was especially important for me as CXO since I had no particular background or sensibilities about the video game market. We also utilized a number of traditional strategy tools to stress-test our new-found intuition about Xenon's path to success.

In 3P Framework terms, we incorporated all of this intelligence into five key priorities for the Xenon three-pager. Selecting these initiatives was definitely the most contentious part of our strategy framework development because it forced the XLT [Xbox Leadership Team] to make concrete, lasting decisions. After much debate and discussion, we established and communicated the following priorities in the original April 2003 document (with some confidential information redacted and technical jargon eliminated):

1. Exclusive Entertainment Content and Services: This is the highest priority because it is the lifeblood of the Xbox business. We must build a plan that utilizes Microsoft-owned franchises like Halo, some targeted games published by others like Call of Duty, and our Xbox Live services, all of which contribute to ensuring that Xenon is the best interactive entertainment platform.

Our content plan must describe how we are going to utilize our key game franchises (timing, product concept, etc.), what requirements the Microsoft studios have to execute the plan, and how the platform, content, and services teams are going to work together to achieve this result. We have to do this for all of the major world markets, especially for Japan. For those titles that are going to be on both Xenon and PlayStation 3 (PS3), we need to provide the right tools and ecosystem dynamics that maximize the likelihood that these titles ship at the same time on both consoles. In the ideal scenario, these titles would start as Xenon titles and migrate later to PS3.

2. Customer Value and Differentiation: Sony is an entrenched, established leader with 60 to 70 percent share of current-generation console sales around the world. While we should be proud of our 20 to 25 percent share in North America and Europe, we have a long way to go "to reach our installed-base goals. Ensuring that Xenon is a clearly differentiated product that provides great customer value is critical to this effort. Differentiation starts with a clear definition of our target audience, their needs, and the experiences that excite them. Differentiation without this first step runs the risk of merely being "different."

Ultimately, we need value propositions that clearly state why Xenon is more valuable for each of the following target audiences: consumers, publishers, game developers, retailers, suppliers, and our internal Microsoft partners. Put differently, it is critical that we shift our value proposition away from "speeds-and-feeds performance" and focus on customer experiences (content and services). Given that we are competing with Sony, it is especially important that we do a great job evolving and developing the Xbox brand to have strong, positive meaning for our target audiences.

3. Profit: Many of the tradeoffs we need to make in building the Xenon plan revolve around how much we can or want to spend acquiring customers versus returning profit to the company. I want to be clear about how we should think about this. We need to reach our critical mass sales goal, which I will define as a worldwide market share of 40 percent. Along with achieving this objective, we will optimize all of our activities around making money for Microsoft.

Our goal should be for the console hardware to break even or make a small profit over the Xenon life cycle. Across the consolidated P&L (which adds Microsoft games, games from publishers, Xbox Live, sales and marketing costs, and all of our overhead), I'm challenging the team to design a business model that makes [redacted] in profit during the Xenon cycle. Profits on game content, both from Microsoft and from fees paid to us by other publishers will make up the majority of this return. This will be supplemented by profit on peripheral products like game controllers, which were unprofitable on Xbox 1.

Finally, Xbox Live must be an important source of profits targeting a [redacted] percent subscription attach rate to each console sold and [redacted] percent of the profit target. Making all of this happen will require significant changes and process improvements across all aspects of our business practices. As one example, we should design a product and business model that can last eight to ten years rather than the four- to five-year Xbox 1 life cycle.

4. Time to Market: We have been saying externally and internally that we would ship Xenon whenever Sony ships PS3, but we need to change this timing and approach for the internal team. If we want to gain share on Sony, we have to ship the base Xenon product by Fall/Holiday 2005 in all major regions (North America, Europe, Japan), and we have to make this mandatory for the team. From a competitive perspective, we must be ready to launch at the same time they do, assuming they are on a Holiday 2005 plan.

My view is that if they believe we are going in Holiday 2005, they won't be willing to risk waiting. In any event, we must have a differentiated offering regardless of timing, and we have the financial commitment to drive hard against Sony if they decide to wait. In terms of territory and feature tradeoffs, there is no requirement to ship every market on the exact same day. In fact, the plan of record should reflect a staggered launch beginning in North America, moving to Europe, and finishing in Japan (where holiday happens later). This maximizes our ability to generate momentum through early success in our stronger markets and to build on that success in Japan. At this stage of the project, it is difficult to speculate which features we would cut or delay to hit this date, but suffice it to say this date is a major requirement and we will consider feature cuts before we slip the console date.

5. The Fifteen-Month Campaign: One lesson we've learned from Xbox 1 is that "the launch" is only the first step toward establishing success. With hardware supply constraints and an enthusiast audience, the laws of supply and demand encourage early positive results. But sustaining a strong start all the way through the second holiday is very challenging: the audience broadens, consoles from all competitors are in good supply, pricing and other promotional efforts play a stronger role, and content breadth and depth become even more important.

Therefore, to win with Xenon, we need an integrated plan that is established well in advance to run a fifteen-month campaign that drives success from fall 2005 through December 2006. Creating this "wave effect" means developing conscious strategies for our content and services roadmaps (down to the geography/studio/franchise/brand level) to maximize console sales. It also implies strong integration in our plans for cost reductions (which increase pricing flexibility), marketing, and sales efforts to drive share effectively. All of this is especially important if Sony decides to wait until fall 2006 to ship PS3. In that case, we will need to execute very, very well to combat their pre-launch activities.

In many respects, these priorities grew out of the Xenon principles, in particular the connection between shareholder return and profit and the global nature of the business. The Fifteen-Month Campaign concept was also tremendously significant. The team morphed this into the First Two Holiday Campaign, or in Microsoft jargon, FTHC, and in the process changed the way they thought about almost every aspect of our plan -- from first principles to beyond the launch period. Each group had to continue their work on the original Xbox, execute on the plan to sunset that product, and plan for the launch of Xenon and the Holiday 2006 work -- all at the same time. While this put tremendous stress on the organization and required equal parts planning and endurance, it was critical to the success of the product we ultimately called Xbox 360.

With the benefit of hindsight, there are aspects of this framework I would have changed. In our desire to beat Sony, for instance, we left our flank exposed to Nintendo's push toward the casual gaming audience, and we didn't think through the process of extending the Xbox 360 life cycle beyond five years. Responses to these issues and other challenges we faced had to be developed in real time, which is never optimal for any team.

With those caveats, actual events played out in a way that fit this strategy remarkably well, or perhaps the strategy influenced how things played out. When Sony decided to wait until Holiday 2006 to launch PS3, having the FTHC plan in place was both prescient and fortuitous. Xbox was able to capitalize on the opening when Sony announced very high launch prices and produced a product that was difficult for developers to utilize.

Looking back on it, I'm impressed by the team's fidelity to the plan. They executed these initiatives consistently and at a high level of quality well through the Xbox 360 product cycle. Thanks to the strategic process and a number of missteps by our competitors, the outcome was a success well beyond our original plan, both in market share and profit.

There is something satisfying about thinking through a problem and crafting five simple approaches to addressing those issues, but publishing the Xenon three-pager was not a seminal event within Microsoft. It was just another memo from a group trying to organize itself to create the second version of a marginally successful first-generation product.

In reality, however, the 3P Framework process was a major breakthrough -- communicating the strategy across the team and up the Microsoft executive chain enabled better decision making and saved us from many strategic debates later on. It put a framework in place within which other elements could be finalized and unleashed the creative and operational strengths of what was quickly becoming a very skilled team.