LOS ANGELES--It's not often that Microsoft CEO Steve Ballmer gives ground, but in an hour-long discussion with game journalists, held on the eve of E3, the energetic booster of all things Microsoft showed himself, and his company's efforts with the current-generation Xbox, to be fallible. Reflecting on the competence, competitiveness, and overall efficacy of the first-gen Xbox, Ballmer said, "We made a commitment to entertainment, and to gaming specifically, but we know we have a lot more to get done with the 360."

He voluntarily reflected on the poor prerelease showing the company gave the first-gen Xbox, calling those early demos "a disaster." Threaded through his comments in the free-form discussion were constant references to what the company must do to better its performance in the console wars with the Xbox 360.

With the 360, Ballmer hopes to turn the tide and compete, not just incrementally better, but so much so that his company's next-gen system overtakes Sony in the sales charts. "We want to outsell Sony, and I think we can," he said. "We're up to bat, we're in the right position, we have a chance."

With Xbox generals Peter Moore and Robbie Bach fielding the tougher questions, Steve "I'm not the gaming guy at Microsoft" Ballmer offered up mostly inspiration and vigor--the specifics were left to the true game guys in the room.

Moore clarified that the demos shown the night before at the Microsoft press conference were all gameplay off alpha dev kits only. "We haven't delivered beta kits," he clarified. Final hardware to developers would come in early July, Moore added. He shrugged off the impressive video Sony showed at its media event, suggesting the video was merely an approximation of what the PS3 will deliver. "The [Cell] chip doesn't even exist," Moore nearly hooted.

Ballmer kept up the charges, chiding Sony: "Our guys were a little flabbergasted that Sony didn't talk more about online. Why didn't they say more?" Bach jumped in to offer some shading on the charge. "Multiplayer is just a piece of it," said Bach.

For most of the hour, the banter continued in that same vein.

Among the nuggets of wisdom that came from the discussion were a few zingers:

When Microsoft was considering the launch window of the 360, it based its strategy on Sony also launching in 2005. When it was finally learned that the PS3 would not get an '05 launch, the company considered a concurrent launch, but with so much critical mass building within the Xbox division, Ballmer said it was "Damn the torpedoes. Let's get a big enough lead on them and go to town." What kind of lead is the company now seeking? The magic number is 10 million offered Moore later in the discussion. "Whoever gets there first is in an enviable position."

Surprisingly, Ballmer referred to the $345 million acquisition of Rare something "we're more excited about [today] than when we did the acquisition." Microsoft has been roundly disparaged for the pricey deal that has netted the top-tier games that were once expected. (Bach, adding some background, said it was the only Xbox expenditure that required the approval of the Microsoft board of directors.)

"Holding onto Kameo for the 360 was a wise decision," said Ballmer. "We all wanted it sooner, but we are better off [waiting]." Bach checked in with a "no debate" comment to back up the senior executive. Ending the Rare retorts, Ballmer invoked the definitive acid test, predicting that ultimately "net shareholder return will be optimized."

Commenting on the ease that game pirates can mod the Xbox, the execs agreed that "with the Xbox, it was too easy [to mod]. In the next generation, we want to figure it out so even if they figure it out, it won't make economic sense."

On the subject of pricing, the message was mixed: "I want to make a lot of money, but the right way," said Ballmer. However, "making money" can be accomplished in more ways than raising the retail cost of the game. "The value of trying to raise prices in a Live world diminishes," he added.

Ballmer suggested Microsoft would look for smaller, incremental expenditures it could extract from the consumer. Bach said rather than raise the selling price of software, the company sees micropayments for pay-to-play downloads, for example, as "ways to spend another $5 or $10 with us," an option made easier with Xbox Live Marketplace, where users can download episodic content that might include new game levels or maps.

Finally, Ballmer called Sony's decision to put its PS3 games on Blu-ray discs a "high-risk, maybe negative-return strategy." He added, "It's not like won't have an HD-DVD option...we'll be agile."

After Ballmer made a clean break for the door, running to catch a plane back to Redmond, Peter Moore, Robbie Bach, and the team of PR handlers allowed the mostly motley crew of journos to hang around and chat informally. Moore made a few dreamy comments: advocating the days of region-by-region rollouts of games was a thing of the past, that for-pay downloads would go a long way toward amortizing the increased cost of game development, that broader gaming experiences should be the goal of all publishers, and that the far-reaching goal of building the worldwide gamer population to 1 billion was "an industry goal we should [all] share."