Microsoft: Out of the X Box

It certainly is. But insane as it sounds, that is all according to the master plan. The whole point of doing the first Xbox was to have a shot at making money next time around. "The first generation, it's just like a video game," Gates says. "If you play perfectly, at the end it says, 'You get to play again.' That's all it says!" He's cracking himself up. He has a surprisingly infectious laugh. "You put your hand in the till. There's no quarter down there. There's no, like, even tickets to buy funny dolls or anything. It's just, Hey, play again."

If all goes well, the Xbox 360 will be out around Thanksgiving; Sony and Nintendo are expected to follow with consoles of their own in 2006. TIME got exclusive behind-the-scenes access to the minds and the strategy that built the new Xbox. Welcome to the future of fun.

LICENSED TO CHILL

Xbox headquarters is a surprisingly unimpressive place, a generic office park in Redmond, Wash., across the road from a large gravel pit. Microsoft's inspiring name for this low-rent nerd farm is the Millennium campus, and it's where the company's money-losing projects live. Not for them the manicured lawns and sculpted berms and softball fields and fancy cafeterias of Microsoft's main campus. They get the gravel pit.

But, in a way, the isolation of the Millennium campus has worked in the Xbox team's favor. The Xbox project is run by five guys, all Microsoft vice presidents, and one thing they realized early on is that while Microsoft was the right place to get the next Xbox built financially, it was totally wrong for it culturally. Microsoft moves slowly and doesn't make sharp turns. It also doesn't play especially well with partners--like the people who write games and make consumer electronics--has little experience building hardware and has never shown much aptitude for nurturing fun, cool brands. So they set up a kind of separate minicompany within Microsoft, insulated from the institutional lameness of its parent. "They allowed us to set up a separate division almost, that is physically, geographically, psychologically and spiritually different from what Bill himself calls the Borg," says Peter Moore, the V.P. in charge of marketing the new Xbox. Moore knew that whatever has made Microsoft successful thus far wouldn't help it here. And Gates seems to recognize that too. "[The games industry] expects us to act like Microsoft: very formulaic, very product oriented, very march-down-the-straight-path," Moore says. "Bill is very important to us, but he's not driving this thing. God bless him, I think he wants to be more a part of it than we actually, you know, feel comfortable with."