Microsoft: Out of the X Box

Bill Gates' time is valuable. There are Microsoft employees who wait their whole career to be alone with Gates for 45 minutes. As the richest man in the world and, arguably, the greatest philanthropist in history, at any given moment Gates could and probably should be off feeding the hungry or curing some horrible disease.

But he isn't. Instead he's sitting in a suite at the Las Vegas Hilton wearing a sweater vest and talking about video games and laughing his head off. Gates is here for a trade show and to talk up Microsoft's new video-game console, the Xbox 360. In person Gates is not at all the stiff, unsmiling mandroid people make him out to be, or at least he isn't at this exact moment. He's loose and happy, cracking jokes and making fun of himself and talking smack about his competitors. True, his hair is weird, and his voice sounds as if still changing even though he's 49. But he seems different. Funkier. "I feel sort of unleashed," is how he puts it. Somehow humanity's most famous nerd has become kind of cool.

It's a decent metaphor for what Microsoft is trying to do in making the Xbox 360. Microsoft, known more for its bullying business tactics than its technological innovation, is trying to act in a very un-Microsoft fashion. It's trying to be quick and nimble, radically innovative, and play well with others. It's trying to reinvent itself from the corporate DNA on up.

But this isn't just a story about Microsoft. It's also a story about a sea change in American culture, which has embraced video games, formerly a despised hobby, as a vital force in pop culture. Gates and his team have spent the past 3 1/2 years working in obsessive secrecy to build the greatest piece of game-playing hardware the world has yet seen. And they don't want to sell it just to a niche audience: they're gunning for all of us.

Even more than that, this is a story about a stealthy technological revolution that has taken place over the past five years, with very little fanfare, and is turning the U.S. living room into a digital, wireless, networked nerve center. You may think the Xbox 360 is a game machine--a toy--but if it does what it's supposed to, it will change the way you consume music, movies, photographs and TV. It might even transform your social life.

Bill Gates would really like a piece of your nerve center. He's bet billions of dollars that the Xbox will get it for him, and hasn't seen one thin dime of profit yet. True, since it launched in November 2001, the Xbox has sold 20 million units, earning it a comfortable, if distant, second place to Sony's PlayStation 2 in the North American market. But the game-console business is a peculiar one: you have to spend a bundle on promotions, and you lose cash on every box you sell, hoping to make it all back by taking a cut of game sales. That hasn't happened yet for Microsoft. "At some point you have to decide, O.K., when do you stop investing to be credible in the marketplace and start investing to make money?" says Robbie Bach, Microsoft's chief Xbox officer. "A billion dollars of losses each year based on the hardware is tough to sustain."