Shane Kim: Sure. Well, first of all, Bungie is very involved in all of that. As the creators of the material, we need their support to execute those well. They're working with Ensemble Studios on Halo Wars, they're working directly with Peter Jackson on the Halo interactive series, so they're pretty closely involved with all of that stuff.

As far as over-exploiting the property--yeah, that's something we have to be very careful about. Right now, you mentioned "unstoppable"--I don't know if I'd use that term--but it is definitely very strong and we want to keep it that way because we've never had a property like this. We're going to be careful with it. We're learning, and hopefully we'll do very good things. We haven't tried to pimp it out too much, and we think the things we've done make sense for not just expanding the game but expanding the universe and the story as well.

Shack: Overseeing development at Microsoft Game Studios, you obviously deal heavily with matters related to first party and exclusives. With the way things are going these days, it seems like those two terms might as well be interchangeable. What are your thoughts on that?

Shane Kim: Oh, I definitely agree. You're not going to get exclusives from third parties in the future--not very many, anyway. The economics of the business just don't support it. It costs too much money to make and to market the titles, so third parties almost can't afford it, and hardware guys can't afford to pay a third party publisher to compensate them for the opportunity cost. You're going to see third party titles on every platform, and we can't count on third parties to do our heavy lifting. That's what the job of the first party is, and my job in particular is to make MGS competitive versus Sony first party.

Shack: On that topic, we've seen Nintendo indicate publicly that it's backing off of studio acquisitions to a degree. What's your approach there? Obviously you recently picked up Lionhead and you've got some big internal studios.

Shane Kim: Yeah. We don't have any stated strategy or objective to own a certain percentage of the studios we work with. We're fairly agnostic about that, actually. We'll do it where we think it'll make sense for us and for the partner, and that was the case with Lionhead. In particular, [Lionhead founder] Peter [Molyneux] was ready to be acquired. He didn't want to deal with all the headaches of running an independent studio.

Shack: It's rough these days.

Shane Kim: It is rough these days. We cared a lot about the Fable franchise, because we saw that it's very important to us. That was a good marriage of needs and desires. But I don't--acquiring a studio isn't always the right answer. It isn't always the solution that the studio itself wants, so we take it on a case by case basis.

Shack: Many people have questioned whether the figures Rare's games have pulled in have justified the high price tag paid for the studio. Looking back now, several years down the line, how do you respond to that?

Shane Kim: I think that the story on Rare is really going to be told in the next three to five years. The kind of titles we're really asking them to focus on now are the Banjos, the Viva Pinatas, the Kameos, and so forth. Rare is going to be our internal studio--really, our primary studio for the most part--that's going to be focused on creating those big, triple-A-level, broad appeal titles. We're entering into the life cycle stage of the console where those kinds of titles can and should do well. We've never been in that stage since we owned Rare. When you look back at Xbox version one, that was a hardcore box through and through, right? Now, Kameo and Viva Pinata have launched during the highest price point of the Xbox 360. Those are really good titles that we're very proud of, and Viva Pinata in particular I think will have very long legs with the television series.

But we've got to get the console to a price point too that's more mass market, and that's going to happen over the next three to five years. Every hardware manufacturer is driving cost out so they can reduce the price of the console itself. When that happens, that's when you're really going to see Rare's value showing through.

Shane Kim: Well, no, our objective is to be the clear winner. Would it be acceptable otherwise? I don't think it would be acceptable. This is why Microsoft is in this business, to win this generation. Certainly, I believe we're in a better competitive situation versus Sony than we envisioned we would be when we launched this program, right? I mean, they're the past two generations winner. We're more focused on executing our strategy and getting to that objective. We're in a better position to actually achieve that now, so that's really what our focus is.

Could there possibly be room for more? Well, I think there would have to be changes in the overall market for that. In some sense, you might say that this generation is going to be different, but I actually don't believe that. The only thing I think is that the timing is going to be different. We're starting at such higher price points in general--there was no $600 console in previous generations that had the goal of being mass market. Even the prices of the Xbox 360 are higher than before. Because of that, the generation is starting later, or going slower, and will have a longer tail. I don't think that at the end of the day we'll be much smaller than the 160 million unit last generation.

Shack: Bearing that in mind, do you think you'll keep your box around longer this time?

Shane Kim: Potentially, yeah--part of it depends on how fast you can get down to that mass market price. If you go back historically, 80% of most consoles' volumes are done at $199 or less. We're sure not at $199 or less, right? [laughs] The faster you get to that price point, typically that's when you can hit the switch on the mass market. The sooner you get there, it could be that the shorter that life cycle will be.

Part of it depends on what the other companies do themselves. Obviously, we launched the Xbox 360 four years after we launched Xbox 1. Will another competitor do that this time? I don't know. We're banking on the Xbox 360 going the long haul, having a long life cycle, but you have to be ready to respond as well.

Shane Kim: Well, first of all, I think Nintendo is very smart. Nintendo focuses on what Nintendo is good at and what Nintendo wants to achieve. They're about the Wii and the DS, and they maximize that business--and taking a big share of first party. I think they care a lot less about establishing a consumer entertainment platform in the home, and about creating an ecosystem for third parties. Nintendo's good and they make a lot of money at what they do.

Their start, I think, is good in general actually for us in the industry. In the long run, if they really attract more people to the industry, that's good because we think we've got the best overall solution. And we're not that far away in terms of price point. The Core is only $50 more. We need to do a better job telling the story there and making sure we have more that's compelling for that audience. We have to compete for that audience. It's not about competing with Nintendo, it's about competing for that audience. If we're going to reach our objective of winning this generation, we've got to reach that customer.

Shack: You've heard this before, but at this point do you still really feel that the Core is a viable choice?

Shane Kim: I do, I do. With the Elite, and the Xbox 360, and the Core, I think we have a pretty interesting and good SKU family that offers a lot of choice. We've obviously taken that strategy of choice, whether you're talking about the HD-DVD drive or the fact that you've got a [range] from Elite to Core. There's going to be a set of customers out there that isn't hardcore gamers but that wants to tap into a high-def gaming experience with a Core system, and that will be enough for them. They may not buy as many games as the Xbox 360 or Elite customer, but they're still a really important part of the overall market. People say, "Why don't you just kill that thing?" Well, that thing is a $300 price advantage versus PS3, right?

Shack: Yeah, it does seem that Sony is really taking the focus off the $500 model.

Shane Kim: You can't buy it here anymore, right? Now, you've got a $600 SKU. It's a tough situation. That was part of betting on Blu-ray in the first place. You've got a drive in every single one, which is very expensive.

Shack: Switching gears a bit, what's the next step with XNA Game Studio Express and Creators Club? Do you have anything immediate in the pipeline for that?

Shack: This might also be a little outside your specific sphere, but as far as IPTV, what's the time frame on that?

Shane Kim: They're working on it, they've got deals going on. That's what I know. I think they've got partners in various parts of the world who are starting to get ready to roll it out, which is exciting. That's about the extent of what I know.

Shack: Do you think we'll be seeing many more titles in the future with the PC to Xbox 360 cross-compatibility in multiplayer?

Shane Kim: No, I think--well, I want to make sure people understand that bringing Live over to Windows is important for Windows, and it's really important for Live, expanding the capabilities of those platforms. A lot of people are not single-platform customers. Being able to extend the same functionality and take that across platforms is really important to Live, because I think Live is actually the most important platform we're building within the company. Cross-platform play across Live is an important thing, because it's something that we're uniquely positioned to do, but I don't think it's good for people to assume that every title is going to be like that.

I guess that's my way of saying you shouldn't expect to see a ton of titles like that, but it is one aspect of being able to extend the service across multiple platforms. Just as important or more important is making sure that we have great functionality with respect to security, or Marketplace, or communication, all of that stuff, so that you're not platform-dependent. That's really the value of Live. You want to be a member of Live, you don't want to think, "What's my login and password over here versus over there?" If we can do that right, that's great, and if we have cross-platform gaming as part of it, that's super.

Shack:

Shane Kim: Well, I'm not sure what they should be afraid of. What we're planning to do as a platform owner is ensure that at the end of the day there are great gaming experiences for customers. We're trying to help validate that for customers so it takes some of the guesswork out of the equation for them. You know, I've heard more concerns from developers and publishers that we might try to make the PC more of a console market, which is not going to be the case. But for customers, I think it's mainly goodness, where we're just trying to bring a greater focus on increasing the capabilities and stability of the system itself, with ease of use, and that's what the Games for Windows program is all about. Then there's getting behind it in terms of marketing the platform, too.

Shack: You touched on my next question, which was about developer response. I've talked to some developers who are very skeptical, and some who are very excited. What kind of reaction are you getting from your end, or is it that same kind of spectrum?

Shane Kim: It's the same kind of spectrum, and we're just going to have to prove it. We have the same thing with Xbox Live. It's hard to remember it now that we have six million members, but 2002? Not that long ago. And EA didn't even join until 2003. People were saying, "You're going to bring online gaming to consoles? What are you talking about?" Blah, blah blah. We had to turn around people's perception, and the same kind of thing is happening on the Games for Windows side. People are saying, "Are you going to charge a royalty?" and we're saying, "Well, no." We need to make sure that we protect the health of the PC gaming category. That's what this is about.

Shack: This is really only applicable to first party so far, but why limit certain games [such as Shadowrun and Halo 2] to Vista-only on the PC? Isn't that going to unduly limit your market penetration?

Shane Kim: Well, it potentially is, sure. There's no question. But look--you don't get to be first party unless you're going to be the one carrying the flag, running up the mountain. It's just like the Rare guys with Kameo at launch and Viva Pinata this past holiday--what publisher does that? Seriously, what publisher? Well, a first party publisher does. Same thing with Halo 2 for Vista. What publisher would do that, not support XP? We think Halo 2 is the kind of title where a lot of people would be interested in playing, and it might encourage them to upgrade their machines to Vista or buy a new machine with Vista. It's really no different from saying that Halo 3 is only available on Xbox 360. It's no different conceptually.

Shack: What do you think about PlayStation Home? Are you guys going to do anything like that, or--

Shack: Here's another topic you surely get asked about a lot. Peter Moore recently called Xbox 360 failure rates a "moving target." Is that an assessment you would agree with, and do you think you're proceeding acceptably on that front?

Shane Kim: Well, I always agree with Peter. [laughs] I think what we're doing is that we're always trying to improve the quality of whatever we do, whether it's hardware or software. As Peter has said, we feel bad when people have quality issues or hardware problems, whether it's one person or a hundred people. The other thing that we're working really hard on is to make sure that if you have a problem, we're addressing that in the best way possible for the customers. You've got to work on both sides of the equation. Like I said, one person having a problem is too much. We know there are things that we're working on, but--well, I don't know if I would say it's a moving target. He wasn't going to give a specific number anyway, and that was his way of saying that. [laughs] But that is definitely an area we're definitely focused on, just like we're focused on cost reduction, just like we're focused on Xbox Live updates every six months.

Shack: Here's an easy one to wrap this up. Obviously at the moment Halo 3 is on people's minds, but what specific other games are you looking forward to this year?

Shane Kim: We've got an awesome lineup. Besides Halo 3, Blue Dragon's coming to the West, Forza 2 and Shadowrun are both hitting the US on May 29. We have PGR4, which is going to be amazing, Mass Effect, Lost Odyssey, Alan Wake, Fable 2, Banjo--

Shack: Banjo is this year?

Shane Kim: No, but looking through the portfolio there are a lot of great titles. There's also some good stuff we haven't announced yet. We've got more up our sleeves. Then there's Gears of War, there's a chance we might do another one of those.

Shack: Yeah, maybe. [laughs]

Shane Kim: Yeah. [laughs] I think we've done a good job of making some very good bets.

Shack: Thanks for your time.

Shane Kim: Thanks, good questions.