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Wednesday, October 3, 2007 - Page updated at 12:00 AM

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Q&A | Plenty of challenges for Bach's division

As Microsoft took the lid off its plans for the Zune music player, Entertainment and Devices Division President Robbie Bach talked with Seattle Times reporter Benjamin J. Romano about connected entertainment, profitability in his division, the changing music industry, "Halo 3" and more.

Here's an edited transcript of that conversation:

Q: Bill Gates and J Allard articulated the connected-entertainment vision, 10-year horizon, and we've seen a big step taken with the next versions of Zune and the software and network behind it. What are some of the big missing pieces you guys are going to be looking for over the medium term?

Bach: There's other areas where we've made progress and we need to make more progress. So, take the whole area of video where we have actually a very nice service on Xbox. We have MediaRoom, which is our IPTV service. We have some things on Media Center, but it's still kind of a disconnected area.

Integration in the mobile space [is] still an area where — not just us, but everybody — is pretty disconnected. I mean today we have hard disks in 20 different places and the challenge is keeping them in sync. What happens somewhere down the road where people say, "Hey, you keep it for me, and I'll just be able to get it."

Thinking through logical extensions to Zune Social and what we do with social networking on Xbox and how that expands is also an area ripe for innovation.

The challenge in the connected-entertainment work isn't finding things where there's opportunity. That's actually not the problem. The real challenge is prioritizing and saying, "Which things do we want to knock off first?" Because each experience has to be great. That's why this launch is very important to us.

Q: Zooming in on the new Zunes here, when you think about your biggest competitor, are you coming after them on price and if so are you constrained at all by your commitment to make your division profitable in this fiscal year?

Bach: I think if you look at the pricing strategy, the pricing is pretty much parity. If you do it per gigabyte, it's pretty much the same. The Zune 4 is the same as their 4-gig nano. The Zune 8 is the same as theirs.

So I think there are recognizable consumer price points. And so I think the place where you're going to see more differentiation is actually around connectivity. It's around social connection and community. It's around our software experience. It's around integration to connected entertainment.

Those are the places where you're going to see us differentiate. I'd much rather differentiate with the consumer experience. I think that's the place where we can add the most value.

Q: On the commitment to profitability for your division — I've never heard definitively whether that was a commitment to ongoing profitability or for the fiscal year.

Bach: I'll give you the mechanical answer and then I'll give you the sensible go-forward answer.

The mechanical answer is, we've said we're going to be profitable this year and that Xbox is going to be profitable this year. That's kind of all we've said.

Certainly the presumption is — so now we're beyond the mechanical answer — that we want to build a sustainable business. Is it possible we could look down the road and say, "Gosh, there's a big investment that we need to make that might make us unprofitable in a year or in a quarter?" Sure. Everybody should always assume that's possible. But do we think that the trend line is toward taking investments and turning them into profit, the answer is absolutely yes.

Q: One of the big changes that struck me immediately as I'm looking at Zune 2007 is the sharing feature. You got rid of the three-day limit and you are apparently negotiating for a lot of DRM-free content as well. So, big picture, what's the negotiating climate like now versus a year ago with the record labels?

Bach: The things that are different are, A, we're in the marketplace. We're No. 2 in our category, They see cool devices coming. So I think there's a credibility point for us that's helpful.

I think, B, everybody in the industry is realizing that as assets have become digital we have to think about things in a different way and so people are a little bit more open to experimentation. And so the idea we'd remove the three-day restriction wasn't like some big monumental discussion. It was, "Yeah, we've heard what people have said too. That makes sense."

The idea that we could then share a song that had been shared with you totally makes sense and people sort of get that.

So I think that there's some more flexibility around that.

The thing that hasn't changed is that the industry as a whole isn't super healthy in two ways. One, it's very lopsided. Apple makes most of the money. The record labels aren't. And that hasn't changed and that's a challenge for the labels and one they're really focused on.

And, B, in general, if you looked across the industry, it's not growing as fast. Digital purchasing isn't making up for the decline in CD purchasing, and that's a continuing trend.

And so, the way I look at that is I say, "Hey, we're doing partner relationships." Sure there's some negotiations. But people want us to be successful. They want a balance to Apple in the ecosystem. They want there to be multiple players in the ecosystem. They like the fact that we're innovating with new models because they've recognized that the new models are going to be necessary.

Q: How are the relationships with your existing partners around the Plays For Sure, Windows Media Player. We saw MTV go off and do something with RealNetworks.

Bach: I think what's going to happen is people will make a variety of different choices based on what's best for their business, and that's totally cool. It turns out we're doing a lot of work with people with the technologies in the music space. So, we signed the DRM work with Nokia, and that's pretty surprising, pretty important deal, pretty big.

We do a lot of work with MTV and will continue to do a lot of work with MTV. They're good partners.

Another example, Toshiba designed and manufactured [the original Zune] for us. They didn't design and manufacture [the new Zunes] for us, but they're still a very important partner for us on [the new Zunes] because we work with them on components and supply chain and a whole set of other things. We're also partners with them in the HD DVD space.

Q: It sounds like Toshiba is still involved in Zune 2007, but to a lesser degree?

Bach: In different ways.

Q: How has your company's expertise in manufacturing hardware evolved. Obviously we've seen Microsoft hardware, just having had its 25th anniversary, but what about in this consumer-focused stuff that has a different touch to it?

Bach: A couple of things. Relative to the mice and keyboards business, the hardware engineering expertise is actually not all that different. If you actually tear open one of today's modern mice — very complicated device. They have wireless technologies built in, they have Bluetooth technologies built in. There's high speed chips in there. There's lasers in there. I mean it's actually a pretty serious device, likewise, as is [Zune].

We have to build — and have now built — an end-to-end system that produces quality. Quality is not about manufacturing per se. That's one aspect of it, and in fact, remember, we don't actually do the physical manufacturing. So in all of our hardware businesses we have other people actually do the manufacturing.

There's quality in the component supply, so it's important for us to work with Toshiba because we care about the quality and the work they produce for us. And then there's quality in design. So we're certainly directly responsible there. And then there's quality of integrating all of that.

The secret to this is getting consistent in quality in all phases of that. So if you get out of phase on something, you run the risk of having a problem. So we're very focused on Zune and on Xbox and on our mice and keyboard business and on our camera business, by making sure we stay in phase on all those aspects.

Q: Do you have an additional risk now that you're in several different lines where someone might associate a problem, say, with the Xbox and call into question quality in another one of your hardware businesses?

Bach: We just haven't seen that. People think about mice and keyboards differently than they think about music players, differently than they think about game players. The audiences actually are different. There's some overlap. But I think generally, people look at things very differently.

A game console is this incredibly complex, cutting-edge, high-end piece of hardware that pushes the laws of physics farther than any device on the marketplace.

[Zune] is a really cool, interesting engineered device. It doesn't break the laws of physics in most ways. That's not a knock. It's just different. And the way people use it, the way they interact with the brands are different. We just haven't seen that.

Truth is we don't see that across Microsoft. People look and say "Office is awesome, and something else maybe isn't my cup of tea." That doesn't mean they don't buy Office.

Q: Did the $170 million in first-day U.S. sales for "Halo 3" exceed your own expectations?

Bach: I think it did a little bit. It's in the realm, it's in the range in which we expected. But the thing that I was pleased about is people love the game. It's a highly reviewed game. And "Halo" is one of those franchises that if we had done a good job, we would have sold a lot of units. But I think we did a great job.

And I think we get that response from customers. You go on blogs, you go on the community sites, talk to people on Xbox Live, they are totally into the game, and that kind of engagement drives sales. It drives more people to buy it. It drives more buzz. It's going to lead to more opportunity for us.

So, I love the numbers, but I like actually the underlying response to the product even better.

Q: Microsoft Game Studios head Shane Kim mentioned to me he had heard from some of your retail partners that they're expecting something like one out of every three "Halo 3" games to walk out of the store with a console attached to it. Any sign of that actually playing out at this point?

Bach: It's too early to see hard data. That'll take two or three weeks for us to develop and put together, but certainly the anecdotal data is we did do a good job with consoles.

The anecdotal doesn't mean a whole heck of a lot because people will tell you what you want to hear. So we have to see the hard data, and you'll see that play out over time.

We're also heading into a time of year where the numbers are just going to go up because we're coming into the holidays, so causality will always be an interesting question."

Q: You get to march Bill Gates out to launch "Halo 3" and he was here today for the Zune. Is that something you have to ask him to do or is he jumping up and volunteering? And what's going to happen when he's just chairman and no longer involved in the company day-to-day?

Bach: First, relative to Bill's approach, it's a little bit of both. We certainly have to ask, just 'cause of his schedule, and he's certainly interested and excited to do it.

For the "Halo" launch, he was actually supposed to be off with a group of the senior leadership team at an off-site and he said, 'No, I've got to go do this 'Halo' thing. I'll join the off-site tomorrow morning.' So he didn't come to the dinner for the off-site, he went to launch "Halo", which was great.

He loves being engaged in our business. But he's also respectful that sometimes it doesn't't make sense, so we try to do a balance.

Going forward, I think ... you'll see more of me. That's why I do the Consumer Electronics Show keynote with Bill. You'll see me again there this year. You'll see a lot of [Entertainment and Devices Division Chief Technology Officer J Allard] because I think he's sort of the vision and spiritual leader of a lot of the things we do in the division.

In a funny way, you won't see as much of [Chief Software Architect] Ray [Ozzie] as you do of Bill, but you'll see Ray's work, and his work will speak for him. So I think the company will work differently, I think that's a fact.

You don't replace Bill. And it's not a plan to replace Bill. It's a plan to work differently. And Bill has been super supportive of that.

Benjamin J. Romano: 206-464-2149 or bromano@seattletimes.com

Copyright © 2007 The Seattle Times Company

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