LAS VEGAS--It's an odd sight when you walk into a Microsoft meeting room and the first things you see are a Nintendo Wii and a PlayStation 3. But the two consoles sat near the door of the meeting room where Xbox 360 director of marketing Albert Penello was holding court during the 2008 Consumer Electronics Show.
Naturally, Penello had the 360 there as well. Not one, but two 360s stood front and center of the room, surrounded by spotless peripherals for the console, including a 360-branded Guitar Hero III guitar, an unopened copy of the Scene It? movie trivia game, and wireless controllers in four different colors--black, blue, pink, and standard white.
There to show off the console was the garrulous and affable Penello, who is best known for spearheading the backward compatibility updates which allow over 450 orginal Xbox games to be played on the Xbox 360. As the revelations--or lack thereof--made in Bill Gates' final CES keynote still reverberated in the industry's ears, GameSpot caught up with Penello to get his take on the latest 360 developments.
GameSpot:: So during Gates' keynote, Robbie Bach said that as of the end of November 2007, the Xbox 360 had generated $3.5 billion dollars, which he asserted was $1 billion more than the Nintendo Wii and $2 billion more than the PlayStation 3. So that's software and hardware combined, right?
Albert Penello: Yes, that's right.
GS: And does that include Xbox Live and other revenue streams like advergaming?
AP: No. It would include points cards bought at retail, but not anything through the [Xbox Live] service. It would include anything in the Xbox Live ecosystem sold at retail if you went to NPD.
GS: So nothing from Xbox Live, then?
AP: Only subscriptions someone bought at retail--but that's an important point, since it reflects the installed base. You know, EA and Activision don't decide to make games unless they think they can sell them. And the investment companies can make in games is dependent on their ability to sell games.
GS: That would explain why EA spent much of last year ramping development of Wii games...
AP: Well, look. The Wii is doing very well--they took a path, they've been very successful, and they should be congratulated. But it's only great if you're Nintendo. It's not so great if you're not Nintendo.
GS: Well what about Sony, then?
AP: Sony hasn't been able to deliver the attach rate. Sure, the cost was a factor in holding sales down, but even the people who buy PlayStation 3s aren't buying a lot of games for it. And that's going to affect how third-party companies decide where their lead development is, how many games they can release for the platform, and what the quality of those games is going to be.
GS: So you don't think that, now that developers are getting more familiar with the PS3 and its price has gone down, the race will even out?
AP: Well, you know, last gen, the reality was lots of people owned a GameCube and an Xbox but did the vast majority of their day-to-day gaming on the PlayStation 2. This generation, your day-to-day gaming is done on Xbox 360. You might go to the other platform for a particular experience, to check out something exclusive Sony has done, or to play Wii Sports with your friends when you get together--though I think that situation is going to evolve with games like Guitar Hero and Rock Band. But when you just want to play a game, you're going to fire up your 360.
GS: Well, I'd say that depends on your taste. However, one thing that's pretty much undisputed is that Microsoft has been successful at generating marquee exclusives for its console like Halo 3, and games that are 360-only on consoles, like Gears of War and BioShock. Late last year, you revealed you're copublishing Ninja Gaiden 2 to keep it 360 exclusive. What other steps are you taking to ensure the flow of 360 exclusives stays steady?
AP: Well we all play games here, so we know how this works. There's exclusives, which is one way you differentiate between the consoles. You say, I want to play Halo, so I'm going to get a 360. You say, I want to play Gran Turismo, so I'm going to get a PlayStation. However, the bulk of your purchases are going to be cross-platform titles, your Maddens, your Call of Duty 4s, etc. And I think that's were I think we excel. I mean you look at Metacritic, and the Xbox  games review higher. And a lot of people are choosing the 360 for cross-platform because you're getting achievements for your GamerScore or for the online Xbox Live experience. Then there's our attempts to go for a broader audience, our investment in Viva Piñata, our investment in Scene It?, the stuff we're doing with Disney, bringing Hannah Montana to Xbox Live.
GS: I found that Disney deal interesting since Disney's delivery medium of choice for high-definition video has been Blu-ray discs, which is backed by Sony. What was the impetus behind that deal?
AP: Well the impetus was that we want to bring as broad an offering of content to Xbox Live customers. It's fairly straightforward--if there's a TV show or a movie, we want you to be able to get it on Marketplace. That's where we want to be. In terms of platform, we've got MGM movies on Marketplace, and they're owned by Sony, and we've got Sony BMG music on the Zune.
GS: I was going to ask about that...
AP: Look, these companies are just so big, that there's these little turf wars and battles being waged everywhere. It's not as simple as when it was just HD DVD versus Blu-ray.
GS: Yeah, it's definitely not simple, with Warner Bros. going over to Blu-ray and Microsoft saying a Blu-ray add-on for the 360 isn't inconceivable.
AP: I've seen this format war declared over so many times in the last year. I've decided my official position is this: It bums me out that Warner went over to Blu-ray, of course. When Paramount went over to HD DVD, I was doing backflips. [Editor's Note: Several reports have Paramount resuming Blu-ray support.] But until Toshiba issues a press release saying they're going to stop making HD DVDs, this thing is far from over.
GS: You think so?
AP: Well, I think if you really go and look at what's happening, the answer isn't stand-alone players. The PlayStation 3 thing is a red herring because we all know that, as a game's library expands and gets more diverse, people are going to be spending more time playing games on their consoles and less watching movies. So no Blu-ray looks better on PlayStation because their games library isn't that strong.
But in reality, who is going into a store and getting a stand-alone [HD DVD] player dedicated to watching movies? So the Xbox 360's HD DVD player counts. I know every single person who picked up our HD DVD player picked it up specifically to watch movies. There's no obscure "Did they buy the Xbox 360 to also do that?," that it's a secondary benefit. Everybody who got a 360 HD DVD player and a stand-alone player got it to watch movies, and if you look at that versus the people who've made that same decision on Blu-ray, the ratio is 2-to-1. Then there's this PlayStation thing. Of course, if I'm not playing games and I've got it, I might as well use it to play Blu-ray. So I think this battle's far from over.
GS: Not sure I entirely agree with you, but fair enough. Now you mentioned an online experience also being a differentiating factor between the 360 and its rival consoles. That said, many people had some pretty rough experiences with Xbox Live over the holidays, so many, in fact that you guys have apologized and said you're going to offer a free game. How exactly is this free game redemption going to work?
AP: We haven't yet disclosed what the game is or how it's going to work.
GS: So it's going to be a game, not any game? As in a singular title?
AP: I'm not sure how it's all going to work--we haven't talked about it. Look, I am totally bummed we had that problem. But I would say this: If you looked over the last six years that we've been running Live, you could count on one hand the number of hours that Live has not been working or had a problem. That said, those problems illustrate how hard it is to do this. We originally projected having just 9 million members, then we counted them and it turned out to be 10. We had the single biggest number of users at one time. We had more signups over the holidays than we anticipated.
GS: So the problem was just the volume, then?
AP: It was, it was.
GS: There were rumors of a denial-of-service attack or some other kind of hacking.
AP: It's my understanding that the system was simply overloaded. More people were logging in, signing up, and playing online than we expected. I mean we had 1 million more people than we anticipated sign up over the holidays--that's a lot of people. But the fact is that it was never really down. There were some intermittent problems, but it was never totally down, really. This sort of thing just shows you how hard something like Xbox Live is to do.
GS: And what about the class action lawsuit filed in Texas on behalf of angry users of the service?
AP: We just heard about that, so I honestly don't know anything about it.
GS: You mentioned Scene It?, which is Microsoft's first real peripheral-based party game.
AP: It did really well around Christmas. The NPD numbers come out next week, until then we're not disclosing sell-through. But for us, we don't have a history in that sort of casual space, so we're building IPs there. Sometimes its working, sometimes it's not. Viva Piñata's a great game, but we don't think it's been as well received as we'd have liked, so we're going to figure out how to make that right. Kameo--not so much. (Laughs)
But with Scene It? we're gonna keep working on that. It's all a longer-term thing, though. You don't build a Mario overnight, you don't build that type of quality IP in a day. You got to keep putting out quality products in quality franchises year after year. So we're gonna try new stuff. Scene It? is a popular board game, the controllers work well, and people seem to dig it. Rock Band and Guitar Hero are other examples of these new type of play patterns.
GS: How has the response been to Xbox Originals on Xbox Live?
AP: I know it's done very well, and we beat our expectations internally. I don't know that we've disclosed anything externally. I mean our thought was, "Let's give it a try." Never has a full-on game of Xbox magnitude been distributed this way. I mean I think it's hard to say [original] PlayStation One games [which are available on the PlayStation Network for download to the PSP] are the same as an original Xbox game, or even a full PS2 game. I think we're gonna keep chugging away at it, we finally have some hard drive space which makes it worthwhile with the Elite, so I don't see any reason why not to. There's a lot of 360 owners who never owned the first Xbox, so there's a lot of titles, like the first Halo, which people can experience for the first time. And since we prioritized backward compatibility according to sales, we've got a nice suite of Xbox Originals to dip into.
GS: Are there any more backward compatibility updates planned for the 360?
AP: We just had a big release before the holidays, which covered a lot of titles--
GS: Like The Guy Game!
AP: [Laughs.] Right. But I suspect any work is going to slow down on that front, merely because we're way past the point of diminishing returns. I think we've got 450 titles out of a library of 700. So if we don't have it, it's either the third version of something, or it just didn't sell. I can't think of any game that we don't have that people want.
GS: Now I'm curious to know how the Xbox 360 Arcade console has done, since it was intended to parry the Wii, which has been in such short supply. Have you benefited from the Wii shortage?
AP: Well, the first thing I will say, to clear the air, is that the Arcade wasn't intended to go after the Wii. We've always had a base SKU [the Core] and the upgraded SKU [the Pro]. We realized pretty quickly that some decisions we made before we launched the Core didn't make any sense anymore. For instance, take the wireless controller. Back in 2004, people thought wireless had just become OK, but was, for the most part, far from good. No serious gamer is gonna play Halo with a wireless controller. We're thinking that as we are going ahead and then, guess what? Wireless adoption is a lot higher than we expected, people are adopting the technology. So a wired controller doesn't make a lot of sense anymore.
The whole thing with the Core is that it wasn't well positioned. When the Elite came out, people realized who we were targeting with that, but with the Core, nobody really knew who we were going after. The target was a price-sensitive gamer who wasn't going to go on line much, but that target was never really clear. So, like the elite, we had to address the target with the name and what was in it. Plus, people didn't think much of the Core--there were some pretty bad nicknames for it I'm not going to repeat here. [Laughs.] So we addressed it by putting wireless in the box, putting memory in the box, and putting games in the box.
So I'll dispute that we created it as a reaction to the Wii's success. We planned it the same time as the Elite, but it just didn't make sense to release it until the holidays, because that's when the customer for it would be shopping. We've had it planned for over a year.
GS: And the reaction to it has been...?
AP: Oh, it's been great. It's sold out all over the place.
GS: Do you have any hard numbers on sales?
AP: I don't know that we've broken out sales on it. I think we'll wait for NPD to come out. Then you'll know. But they sold out right away, and I can tell you we saw a pretty drastic increase of sales from Core to Arcade.