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There's not long to go now until Xbox 360's launch. How do you feel about things, about how things are shaping up?

Bach: Last night was the night we've been waiting for, for three years, and there is a tremendous sense of pride, I'd say, in where the project is right now. We still obviously have a ton of work to do, we have to get it onto the market, we have to market it successfully, get the games going, all those kinds of things. But there's certainly a sense of pride and a sense of confidence. We feel like we're in very good shape in where we are. I feel very good about what we've done so far. I do the comparison... if you go back a year and say "On October 5 this is where you'll be and this is where the project will be, how do you feel?", I would have said "awesome". I feel like we're in pretty good shape.

How important is it for you to have the head start against Sony and Microsoft this time around?

Bach: We think of the time advantage... It wasn't something we actually designed for. We originally said our design point was "We don't want to ship after Sony". Actually it'll be fine shipping at the same time, but I don't want to be after. Ultimately, the development team said "Well we have to pick a date because otherwise we won't know when we have to finish" and a development team without a finishing date doesn't work very well. We ultimately picked this date and Sony subsequently chose a different date. That said, I think being first is an opportunity for an advantage.

It doesn't guarantee anything, but it does mean that if we execute well and we have great games and we can get people excited, then it is a real opportunity because then it puts Sony on the defensive, they have to catch up, it helps our cost structure because we can drive down costs faster than they can because we're senior with more volume. You get this positive movement or momentum effect of more games coming to your platform because people are playing your games first. By the time they [Sony] launch we'll be producing second-generation games so the quality of our games compared to their games at launch is just going to be better. It all requires great execution but certainly the opportunity is there.

You're beating the competition to launch. What does that mean for you?

Bach: If we thought our time advantage over Sony was three or four weeks I'd be concerned about that, but we don't think it's three or four weeks and we know what our capacity ramp's going to look like - I think the ramp's going to break. On day one will we be able to meet demand across every market around the world? I think the answer's "probably not" given what I know about demand. And that is more a statement about demand than it is about supply. There's going to be a lot of people who want this product and I think we will have to work hard to keep it in stock. That said, we're going to ship new units every week, so whatever we have on day one, we're going to sell through that I think very quickly, and then there'll be stuff for the next week and stuff the week after that and stuff the week after that. Given the time advantage we have I think we'll be able to get plenty of product in the market to build something that's going to take Sony time to catch up on.

What effect do you think Nintendo's new strategy of attempting to broaden the market, particularly in light of it's controller unveiling, will have on the Microsoft and the games industry as a whole?

Bach: I think it's kind of early to know. Certainly we love it when we see somebody do something new, that's always interesting. And we actually agree with Nintendo in the sense that we need to make games more approachable. I don't think that's a hardware issue, I actually think it's more of a game design issue more than anything else but you know, hardware's one way to approach it. Frankly, it's not clear to me that holding something like this is any easier than holding it like this.

The tricky part for Nintendo is that they've got to think about third-party publishers as well. How do you do a cross-platform game? It's really very tough because the input device is so different that you're basically going to have to redesign the game and at today's cost levels that's just hard for people to do.

I think it's interesting, I think it plays to Nintendo's strengths, their first-party teams I'm certain will take advantage of it. I'm sure they'll produce some innovative titles just like they have this generation. But I also think their box, if you look at it, its entirety, what we know about it, is really designed to continue the market they have today which is like a 10 to 20 percent market share player... it's core to Nintendo but they know how to market to them. That's fine. That's good for their business. But I don't think it makes them as big or as competitive to us as Sony.

The Revolution's got pushing its new control peripheral and Sony's already dabbled with new methods of interfacing using peripheral likes the EyeToy. It's not an area Microsoft's really explored as yet though - can we expect to see you experiment more in this area with Xbox 360?

Bach: We have I think 16 peripherals available on launch. We've also said publicly we will be doing a camera. It won't be available at launch but we will do a camera - it'll probably be a better camera than the EyeToy is. It'll be used for some of the same things and some new things. The idea that we'll be able to do video chat on Xbox Live is very real and we think pretty exciting. So we will do those kind of peripherals and we do continue to look at other products in the hardware market for new ideas.

One of the things you did with Xbox was you made Live a really viable marketplace. How is Live going to grow in the next generation and do you have a target you want to hit?

Bach: The first place to start is we want to grow by getting more people to try Live. It's the reason we've introduced the Silver level of our service, which is free, which lets you get a gamer tag and lets you do voice chat, lets you meet your friends, lets you do downloads, all those kinds of things. When you want to do multiplayer gaming you have to upgrade to Gold which is a paid level of subscription. Our target at Silver level is to get about half of our hardware customers onto the Silver level is some way, shape or form. We're also trying to build the service by making it easier to be on the Gold service. Today, particularly in Europe, it's a pain that we have a credit card requirement, and in many parts of Europe that has restricted our ability to drive Live subscriptions. With the next generation we'll be able to use debit cards, a lot of variety of forms of payment in the system. We think that will help.

The other thing we're trying to do to grow Live, again in particular in Europe, is really build the service so we can build more communities. One of the challenges you have in Europe is you have a language difference between countries, where in the US...Europe's actually bigger than the US... if you do it by language, none of the countries in Europe approach the size of one English-speaking market in the US. And so what we have to do in Italy, in Spain, in Portugal, in Germanic countries, in places where French is spoken, you have build communities around those language areas so that people can play against people who speak their language. So much of it is about verbal communication, so there are things we're doing in programming the network in providing content to try and drive that kind of community.

Microsoft's traditionally had a reputation for focusing on testosterone-driven "hardcore" gaming genres. Is this something we can expect to continue into the lifecycle of the Xbox 360 or are you actively seeking new areas and audiences to explore?

Bach: Certainly what you'll see at launch is a little bit more focus on what I'll call the traditional game, that's true. Having said that the portfolio that we showed last night, when you actually look at it, is actually fairly broad. You've got racing, you've got sports, you got action, you have adventure, there's several RPGs in there, it's a pretty good cross-section of the industry. I think it's an appropriate launch portfolio for the beginning of the console life cycle.

The second point I'd make there is you did see last night the first efforts on our part to really reach to other audiences and people. Maybe we didn't highlight it as well as we could have but things likes Xbox Live Arcade really are designed to reach that audience. We already have on Windows the equivalent of Xbox Live Arcade in our MSN gaming site. 65 percent of people who play those games are women. We really know that those style of games, the quick games, the puzzle games, the strategy games, they don't have a high user interface component to them, do appeal to a much broader audience.

We think the media capabilities we're showing, interactive music, digital photography, those types of things, will appeal to a broader audience as well.

Bach: Those are the first steps and as we get into 2006 there's several things in our portfolio we didn't talk about last night that will help drive that. If you think about what we need to accomplish, we need to do this approach that builds on our core audience, so we have to meet them with the content they want to have and then add onto that the expand the marketplace. And that has to happen in phases and in a paced way. What you're seeing now is the first steps, the early steps with Arcade. I mean there's going to be about 15 games on Arcade at launch - there'll be as many Arcade games as there will regular Xbox games.

The final point I'll make - it's more of a philosophical point than anything else - we never think about this as designing girl games. There isn't something that's a girl game. There are games that appeal to people who have more interest and more casual interest, have different characteristics, and a lot of the challenge we have actually isn't just reaching women, it's reaching people who aren't gamers, and some of them are women and some of them are men. And they have a different set of interests and we have to figure out how to reach them with new ideas.

A big deal has been made about high defintion TV with Xbox 360 but the reality is that it's still really in its infancy in terms of consumer ownership... isn't that a concern?

Bach: The cost of high-definition TVs is coming down. That's a natural function of volume. If you look at the glass capacity that's been put in place to produce flat-panel, high-definition TVs, it's quite clear the prices will come down, we've already seen that. Take an Xbox game on a standard definition TV today and take an Xbox 360 game on a standard definition TV today, and they're radically different. You sort of going to get a double bolt this time. You're going to get standard definition increase because it's a new generation of hardware and then you're going to get the HD improvements.

What are you going to do this time around to combat the likes of piracy and modding?

Bach: Xbox was designed with off-the-shelf parts in eighteen months and in the process of doing that, there were pretty severe restrictions on what we could do to prevent modding the box - thing is, when you have off-the-shelf parts, you can't do much custom and even the stuff we did do turns out to be relatively easy to defeat. With Xbox 360, we started from scratch and so we have done in both hardware and software, what I'd call more sophisticated techniques to protect our hardware, to protect our software. Nothing's foolproof, that's true, but we can make it harder and less economic for people and I think we'll succeed in doing that. Will people try to figure it out? Sure they will. Will they try to mod the box? Of course they will. Will some of them succeed with some amount of effort? Maybe, but I think it'll be much better than what we've done. I won't go into the nature of our techniques otherwise that will help the enemy, but we certainly will take the same approach, which is we will have way to attack people playing on modded boxes - modded boxes won't be allowed on the servers.

Certainly for us, the security of the system, the security of the Live network and maintaining a level playing field is incredibly important and we do lots of work to make sure that stays that way. That's part of our brand, it's part of the core of what we do and you're going to see us continue to do that. Are people always pushing us? You bet. Some people just think it's fun to do that, and that's okay - we're happy to keep matching wits with people. And I think we'll be successful.

How do you see the Xbox 360 console launching over its life time, for example, with features like HD-DVD, extra hard disks and more tech?

Bach: Certainly, there are opportunities for us to evaluate - you raised the HD-DVD question, and right now that's a tricky area to evaluate because it's unclear what's going to happen. There's the HD-DVD camp, there's the Blu-ray camp and now there's a camp doing both - it's actually quite confusing. I actually know a fair amount about it and it's confusing me. We'll see how that plays out - we have some flexibility there depending how things play out, but there isn't anything to do right now. The second thing I'll see about that is that it's entirely unclear whether the disc is going to be the primary form of distribution five or seven years from now. Just like in music space where discs have become sort of not a big deal, the same thing could happen to movies all the time. We just have to do it smartly so that the industries intellectual property stays protected and they continue to generate the money they need. So we'll see how that plays out. As far as other things, I think we've been pretty clear - the hard drive in this box is removal. Is there an opportunity to produce a hard drive that's bigger? Sure. Is it something we'll think about? Of course. Could we do a bigger hard disk? Yeah, absolutely. So there are ways to evolve the hardware, there are additional peripherals to talk about. I've talked about the camera already and we've got three or four other peripherals we're working on that I can't talk about but that I think are pretty interesting, so you're going to see the hardware continue to evolve. You know, what won't change is the core performance relative to games because that has to stay locked for the lifecycle of the product.

Project Dark, we noticed, seems to feature several subtle in-game advertisements. In the next-gen, do you think in-game advertising is going to increase and do you think Microsoft should maybe keep tabs on it?

Bach: There's two sets of things - do people want an advertisement to go up in their game? I know the answer to that is no and we'll protect the integrity of their gaming experience from that perspective, so let's just say that flat out. Do I think there are promotional opportunities that are advertising-like things? The answer to that is absolutely yes. In-game promotion happens on TV and movies today, it's part of the environment - if it doesn't get in the way of gameplay, people don't care. We haven't had a lot of feedback - we do a little bit of that today, EA does some of that today, people do that today and I don't think that's a big deal and it will probably continue to grow. There's also that the likelihood on Xbox Live that you'll see sponsored tournaments, sponsored competitions, those types of things. Those are additional revenue opportunities for us and our partners and I think we'll take advantage of them. Do I think you're going to have advertising like what's on TV? No, TV is moving more the way of videogames in a funny way and I think you're going to see that trend continue.

So you don't think it'll get to the point where you might be playing a game and you have to take a character to McDonalds to continue playing, for example?

Bach: No, it's self policing, it's self policing - if it gets that way people won't buy the games. This is the cool thing about the environment: if one game publisher or developer gets out of hand, you know, people will just say "well great, I'm not going to buy that game, I'll just buy the game that doesn't have advertising". It's self-policing.