Xbox (console)

• 1. Introduction

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  The Xbox is a home video game console that Microsoft released on the 15th of November 2001, and it arrived bearing a peculiar origin story. A name the marketing department tried to bury turned out to be the most popular option in focus testing. A controller so large it earned a Guinness World Record for biggest in gaming history launched a console meant to take on the world's most dominant platform. And a company whose name had never appeared on the front of a game console box suddenly found itself selling hardware in the middle of the night at a Toys 'R' Us in Times Square, with Bill Gates personally handing over the first unit.

  The questions this story raises are the interesting ones. Why did a software company with no console experience decide to build one from scratch? What happened when it collided with the realities of manufacturing, pricing, and the Japanese market? And how did a machine that lost its maker more than $4 billion end up reshaping the entire games industry anyway?

• 2. A Threat From Sony

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  Sony announced the PlayStation 2 officially to the public on the 2nd of March 1999, and that date set off a chain reaction inside Microsoft. The PS2 was not just a game machine; Sony intended it to replace the desktop computer in the home entirely, supporting CD-ROM and DVD playback and positioning itself as a gateway for all types of home entertainment. Bill Gates saw this directly as a threat to Windows PCs. He worried that an all-encompassing living-room device could eliminate consumer interest in personal computers altogether.

  Gates had already tried softer approaches. He had directly approached Sony CEO Nobuyuki Idei before the PS2's public announcement, proposing that Microsoft develop programming software for the console. Idei declined in favor of Sony creating its own proprietary software. Microsoft also held talks with Hiroshi Yamauchi and Genyo Takeda of Nintendo about a potential acquisition, but Nintendo walked away from those discussions as well. Sega, meanwhile, had already built a version of Windows CE into its Dreamcast console, giving Microsoft at least one foothold in the living room. But Gates concluded that a foothold was not enough. Microsoft needed its own console.

• 3. DirectX Versus WebTV

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  In 1998, four engineers from Microsoft's DirectX team started sketching out what that console might look like. Kevin Bachus, Seamus Blackley, Ted Hase, and DirectX team leader Otto Berkes wanted to build a machine from repurposed PC components running DirectX technology. Nat Brown, the Windows Software Architect, joined the project after meeting Hase in November 1998. The group codenamed the effort "Midway," after the World War II battle in which American forces decisively defeated Japan, a pointed metaphor for Microsoft's ambitions against Sony.

  The internal battle that followed was almost as intense. Microsoft executive Craig Mundie backed the WebTV team, which had joined Microsoft after the acquisition of WebTV and believed the console should be a ground-up appliance running Windows CE. The DirectX team pushed back hard, arguing that standard PC components like a hard disk drive were cheaply manufactured and could be updated annually. Ed Fries, the head of Microsoft's gaming division, sided with the DirectX team, particularly over the hard drive, which he believed would give the console a technical edge despite its manufacturing cost.

  On the 5th of May 1999, both sides pitched Gates at a meeting attended by more than twenty people. The WebTV camp, which included Nick Baker, Dave Riola, Steve Perlman, and Tim Bucher, argued for a cheaper appliance and a custom graphics chip. Seamus Blackley countered that DirectX hardware would let PC game developers port titles to the console with ease. Gates sided with the DirectX concept, and Berkes' team received permission to build the console.

• 4. Building and Naming the Machine

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  Rick Thompson and Robert J. Bach oversaw the Xbox's physical design, and the path was not smooth. Early prototype work, built from Dell computers stripped for parts, revealed that Microsoft would have to manufacture the console itself rather than hand it off to a third-party computer maker. That prospect was costly enough that the project picked up a grim internal nickname: "Coffin Box." The fear was that the project could end careers at the company.

  The tension came to a head on the 14th of February 2000, at a meeting informally called the Valentine's Day Massacre. Gates vented furiously about the new cost proposals and the ways the console had drifted from the original pitch, particularly because the Xbox appeared to sideline Windows. After being reminded that the whole point was to compete with Sony, Gates and Steve Ballmer gave the project the green light.

  The name the console would carry was settled almost by accident. Among the candidates were "Windows Entertainment Project," "Microsoft Total Gaming," "Microsoft Interactive Network Device," and "Microsoft Interactive Center." "DirectX Box" was shortened to "Xbox" through an email exchange. Ted Hase also suggested "XXX-Box" and "DirectXXX-Box" in jest, a nod to the system's higher proportion of adult-rated content compared to Sony or Nintendo's platforms. Microsoft's marketing department disliked "Xbox" and proposed "11-X" or "Eleven-X" as alternatives. During focus testing, the name "Xbox" was placed on the list specifically to demonstrate how unpopular it would be. Instead, it came out as the most popular option and became the official name.

  Flextronics was brought in to help refine the design and handle mass production, building a factory in Guadalajara, Mexico. Early production units had a failure rate of around 25%, which Flextronics repaired. Just before the console's public reveal in January 2001, the engineering team switched from AMD to an Intel CPU without notifying AMD first.

• 5. Launch and Halo

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  Gates unveiled the Xbox publicly alongside professional wrestler Dwayne "The Rock" Johnson at CES 2001 in Las Vegas on the 3rd of January 2001. Release dates and prices were announced at E3 2001 in May. Online preorders at Toys 'R' Us and Amazon sold out within 30 minutes.

  The official launch at midnight on the 15th of November 2001, came three days before the Nintendo GameCube's launch. The night before, a special event at the grand opening of the flagship Toys 'R' Us store at Times Square put 1,000 consoles on sale. Gates was present, personally selling the first unit and playing games with customers at the display stations.

  The September 11 attacks earlier that year had complicated preparations. Microsoft could not travel to the Guadalajara facility to test units, requiring an alternate local arrangement to have them ready in time.

  Halo: Combat Evolved drove a significant share of the launch's success. The game had originally been announced for personal computers, and Microsoft acquired its developer, Bungie, in June 2000, making Halo an Xbox exclusive launch title. Its attach rate at launch reached 50% of all consoles sold, meaning half of every Xbox buyer picked up the game. Halo surpassed one million units sold by April 2002. Microsoft sold 1.5 million Xbox consoles before the end of 2001, with unit sales crossing the one-million mark just three weeks after launch.

• 6. The Cost of Entry

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  Each Xbox sold in 2001 at an initial retail price of $299, but cost $425 to manufacture. Microsoft lost approximately $125 on every unit. Robbie Bach, reflecting on the situation, said that roughly six months after launch, anyone who looked at the price curve could see that the company was going to lose billions of dollars.

  In April 2002, Microsoft cut the retail price further to $199 to drive hardware sales, deepening the per-unit losses. The company depended entirely on software sales to recover ground. By the end of 2004, Microsoft had turned a profit for the first time, but the accumulative loss over the console's lifespan reached $4 billion.

  Cumulative worldwide sales reached 24 million units by the time manufacturing stopped in 2005. North America accounted for 16 million of those. Europe contributed 6 million, and Asia and the Pacific region added 2 million. Those figures fell well short of Microsoft's internal prediction of 50 million units and nowhere near the PlayStation 2's lifetime sales of 106 million. The Xbox did outsell the GameCube and the Dreamcast, whose lifetime sales reached 21 million and 10.6 million units respectively, though the GameCube turned out to be more profitable than the Xbox.

  Gates, Ballmer, and other executives still regarded the Xbox as a success in strategic terms. It brought Microsoft into the console marketplace despite considerable skepticism from the industry and laid the foundation for everything that followed in the Xbox product line.

• 7. Japan and the West

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  Before the Japanese launch in February 2002, analysts widely expected the Xbox to struggle. The console's size was a genuine obstacle in a market with smaller living spaces. Its library was heavy with games aimed at Western audiences, and the machine carried a comparatively high price against local competitors.

  The results confirmed the concern. Microsoft had hoped to ship six million Japanese units by June 2002. By April of that year, just two months after launch, the system had sold only 190,000 units in the region. For the week ending the 14th of April 2002, the Xbox sold 1,800 units in Japan, a figure that failed to place a single Xbox title in the top 50 best-selling games in the country. By November 2002, the Xbox chief in Japan stepped down. That month, the system had sold just 278,860 units in total since its Japanese launch. For the week ending the 18th of July 2004, weekly sales had fallen to 272 units, lower than the PSOne was selling in the same period. The Xbox's entire Japanese lifetime sales totaled 474,992 units.

  The contrast with North America was stark. In the U.S., the Xbox outsold the PlayStation 2 in April 2004. By July 2004, the system had captured a 33% market share in the United States. The platform's Western orientation was a commercial strength at home and a structural weakness abroad.

• 8. Xbox Live and a Lasting Legacy

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  Microsoft launched Xbox Live on the 15th of November 2002, exactly one year after the console's release. Users needed a broadband connection and a starter kit containing a headset and a subscription. In the first week, the service attracted 100,000 subscribers. Within two months, that number reached 250,000. By July 2004, membership hit one million. It reached two million by July 2005, three million by July 2007, and twenty million by May 2009.

  Halo 2, released in 2004, became the highest-grossing entertainment release in history at the time, earning over $125 million on its first day. It became the third game to be called a killer app for Xbox Live, after MechAssault and Tom Clancy's Rainbow Six 3. The popularity of games like Halo 2 contributed directly to the rise of first-person shooters and online console gaming as mainstream genres.

  Xbox Live support for original Xbox games ended on the 14th of April 2010. A group later known as the "Noble 14" kept playing past that date for nearly a month by simply leaving their consoles connected to Halo 2. Revival servers, including one called Insignia, have since restored online multiplayer for original Xbox games. The Xbox 360 announced on the 12th of May 2005, on MTV, carried backward compatibility for a limited number of original Xbox titles, and the Xbox One received similar support after an announcement at E3 2017.