At the dinner in France, she recalled, "that's all I talked about `Do you guys get that you screwed up?' "
Inside Microsoft, some people clearly had learned from the mistakes of E3. The next night, Microsoft held a gala to announce that it would begin selling the Xbox in Europe on March 14. Reporters across Europe were invited to Cannes to Pierre Cardin's cliffside mansion, which was bathed in light colored the machine's signature green. Lasers projected the Xbox logo on nearby homes as Microsoft showed off stunning new games. Glowing reviews poured in.
Even so, Microsoft has yet to demonstrate that flair in the United States. Even its supporters question whether it can win over consumers quickly enough to build the fan following that Sony and Nintendo enjoy.
"This is an industry that has as much to do with emotion and Hollywood as it does things having to work perfectly out of the box," said Peter Moore, president of Sega of America. "One could argue that Microsoft doesn't really understand any of those issues yet."
And there is another problem: while errors are fixed easily in the traditional software business, Microsoft may have only one shot at the fickle game consumer. "Unless they have a successful launch," said Kazuo Hirai, president of Sony Computer Entertainment America, "there really is no Xbox 2.0 to be had." Experts figure that the Xbox has through the 2002 holiday season to make its mark.
But Bill Gates, the Microsoft chairman, said in an interview: "We're so committed to this thing. When we do something we stick to it."
The Market: A Giant Struggles for a Foothold
For Microsoft, the allure has been clear for years. Entertainment is going digital. Film, music and electronic games are converging into the same devices. In the living room, that device is the TV set-top box. Whoever controls it, Microsoft believes, controls the future of home entertainment.
Mr. Gates calls Windows XP, the MSN Internet service and the Xbox the "three pillars" of his strategy in the home. With built-in voice capabilities and a high-speed Internet connection, the Xbox is expected to eventually allow game players with headset microphones to talk with players in other countries and swap digital files like music and photographs. "We're going to put new software that runs on Xbox that, both in the gaming dimension and other dimensions, will amaze people with the power that's in this box," he said.
And J. Allard, general manager of the Xbox platform, said: "So far, we've focused on 9 to 5. Now it's time to focus on leisure, and focus more on 5 to 9."
Video games offer a tantalizing target. About 42 percent of all American households own at least one game console. Revenue from game software will total $17 billion worldwide this year, $7 billion of it in the United States, according to the SoundView Technology Group, an investment bank based in Old Greenwich, Conn. And the video game industry has the only purely digital entertainment, Mr. Allard said.
For years, Microsoft has searched for ways to make money on games without taking on the heavy costs and razor-thin profit margins of building consoles. Its PC games division has made some best-selling titles but has never won more than 8 percent of the market. Ed Fries, who ran the division, said he considered writing games for consoles but refused to follow strict rules imposed by system makers. "You give up a certain amount of control when you publish on a console, because a console maker can tell you what you can and can't do," Mr. Fries said.
As Sony disclosed details about the PlayStation2 in 1998 and early 1999, Mr. Gates summoned the leaders of Sony, Nintendo and Sega separately to Microsoft's headquarters and asked them to use a scaled-down version of Windows as a platform. Sony and Nintendo declined. Sega, running a desperate third, agreed and ran such a version on its Dreamcast machine, alongside its own operating system. Given a choice of platforms, developers chose Sega's. The experiment failed.
Mr. Gates and Isao Okawa, the late president of the Sega Corporation, considered having Microsoft merge its gaming division with Sega or buy Sega outright, Mr. Moore said. Those talks failed.
In the meantime, PC sales were slowing, and the Sony threat was mounting. The year-old PlayStation2 was the first machine of its kind to resemble a high-powered PC. In addition to games, it played DVD's and music CD's. A broadband connection, new games and an online service with Sony's partner, AOL Time Warner, all expected over the next year, will let PlayStation2 owners compete in online tournaments, download new characters and even send instant messages.
If no one would let Microsoft into the game machine, it would build its own.
The Planning: An Idea Percolates Toward the Top
In early 1999, about 50 Microsoft executives gathered at the Semiahmoo resort in northern Washington. They proposed a wide range of topics, then went off in groups to discuss them. Robbie Bach, who ran the consumer division, had heard rumors that some engineers were exploring an effort to break into the game console market, so he proposed that. The idea intrigued Mr. Gates.
"Bill had proposed his own topic," Mr. Bach said. Instead, he "spent about two hours with about 10 of us, talking about the game console market, what it would mean for Microsoft to get into it, what kind of technology we could bring to bear."
Craig Mundie, then a senior vice president, emerged from Semiahmoo with a directive to explore making a game machine.
But if it had not been for a guerrilla campaign by a small group of programmers, the company might still be fretting about how to enter this market. These programmers worked on DirectX, its game development software, and many had once worked in the games industry.
The plan was hatched by Seamus Blackley, who had created games for Steven Spielberg's DreamWorks Interactive. He wrote a long memo urging Microsoft to build its own game system using PC parts, calling it the DirectX Box.
Mr. Blackley showed his plans to three colleagues, who made suggestions and plotted. "No one Craig or anyone else at that retreat had any idea what the game industry was," Mr. Blackley said. "It's kind of a joke that they were thinking, `We'll do a game console.' It's kind of like me saying, `I'll do an atomic weapon in my garage.' "
The DirectX crew knew that the company's top executives would recoil at taking on Sony head to head in manufacturing, so they started furiously pitching a smaller plan: a computer maker like Dell or Fujitsu would manufacture the consoles, which would also run PC games; they would try to sell tens of thousands of units, while Sony and Nintendo sell tens of millions.
"We had a secret plan, which was to find a way to introduce Microsoft executives to the concept of manufacturing a piece of hardware themselves," said Mr. Blackley, the project's technical officer. "There's a whole level of naïve brinkmanship that we had, which is charming now but was terrifying in retrospect."
The DirectX team began showing up unannounced at executive meetings. They won the support of Mr. Fries, then more executives. In July 1999 the project reached Mr. Gates, who approved an early technical plan and assigned Mr. Bach and Rick Thompson, who ran the hardware business, to build a business model.
The team began extensive talks with game developers, asking what they wanted. The console was given an 8-gigabyte hard drive a huge data cache that no other console has so developers could quickly stream realistic graphical worlds onto the screen.
Mr. Gates devoted more and more time to the project, at one point sending engineers back to the drawing board to find more power. "The performance isn't high enough; shoot higher," Mr. Fries recalled him saying.
"We were looking at something that was maybe 50 percent higher than PlayStation2," Mr. Fries said. "He was concerned that that wouldn't be a big enough difference for people to really see and appreciate. That's when we created what we have now."
By the time the team sought final approval, the business model had changed completely. The machine would run no PC games. Computer makers had little interest in building the machines, which often cost more to make than their selling price, without a significant share of the revenue from games, so Microsoft decided to design the machine and outsource manufacturing to Flextronics. And instead of making tens of thousands of consoles, Microsoft would make tens of millions. It would aim for Sony.
The final approval meeting became known as the Valentine's Day Massacre. Held on Feb. 14, 2000, it began at 2 p.m. and was scheduled to end at 4, but it dragged on past 8. Mr. Gates and Steven Ballmer, the chief executive, fired question after question.
A key concern was cost. Mary Meeker, a Morgan Stanley analyst, estimates that Microsoft will lose money on the Xbox until 2004 up to $700 million this year alone when it could sell enough software.
Finally, Mr. Gates and Mr. Ballmer approved the project. A month later, Mr. Gates announced the Xbox at the Game Developers Conference in San Jose, Calif. Mr. Blackley, who wanted to show the industry that the Xbox was not just another of Mr. Gates' offbeat ideas, joined him in wearing sneakers in "illegal red," a shade banned in games development because it appears green on TV. His message to developers was clear: This is Microsoft, but we understand you.
The Start: Getting the Games for the Machine
From the start, the Xbox team tried to distinguish itself from its corporate parent. The division, which now has 1,000 employees, set up shop across town from the main campus in Redmond, Wash. Vintage arcade games occupy a corner of one floor. Green lights cast an eerie glow in hallways. Each conference room is named for a classic video game system the Atari, the 3DO. Paintings on the walls have titles like "It's the Software, Stupid."