Original subtitles

CNBC's Jane Wells live in Los Angeles

with how the 360's problems are heating up literally.

This all came together in this horrific perfect storm.

Some faulty Xbox 360s are literally melting down while running certain games.

It was a slow rolling thing, like, really understanding how big the problem was.

It started to really be concerning and the numbers started to grow.

I had a sick feeling in my stomach.

Microsoft hasn't specified the cause,

but users say the console's cooling system

just can't take the heat of a lot of play.

We were just having failure after failure.

The problem was huge.

Mine just crashed this holiday season.

Get one back, turn it on, it didn't even work.

No! Again!

People spent a lot of money on a console

and we're getting two and three of them back.

Whether they were friends, whether they were family,

whether they were people on the street.

It didn't matter. It was all over the place.

I was mad as

Then it became the media saying this is a piece of hardware

that has been rushed to market, and as a result

we're seeing unprecedented failure rates.

It's broken.

Everything that I had worked for for the last couple of years is trashed.

There's a new contender in the video game wars.

Xbox is going to be....

- The future. - Truly the future of video games.

Xbox. Taking over the living room.

Limitless, connected digital entertainment.

You guys never understood!

The company is going to face fierce competition.

Sniper. Nooo!

It's a ticking time bomb.

It makes me very nervous to actually play this for you.

Xbox, getting a major overhaul.

A bold vision for the figure of gaming.

It's the Xbooooooox!

Without a doubt, the most Herculean feat

of the original Xbox was that it survived.

Looking at the history of the video-game business,

you would have given them a million-to-one chance,

so the achievement is that we made it to Xbox 360.

And, internally, it's fun to laugh at lots of the missteps.

You'll see Xbox will actually start up.

Like we can laugh

that the Xbox didn't turn on at the original unveil.

We can bring that video up?

But with Xbox 360, honestly, even with the benefit of time,

nobody laughs at the red rings.

To understand the red rings of death,

you've gotta go back to the beginning

and all of the work we did on the Xbox 360 to build it from the bottom up.

We were absolutely focused on getting out ahead of the PS3.

We needed to be seen as the start of the next generation.

The 360 was five to ten times more powerful than the original Xbox.

And so, to achieve that level of performance,

we had to push technology and solutions

that didn't exist in the previous generation.

This was an incredibly hard, complicated program.

The circuit board itself is, is a completely custom design.

And we were building these chips which was a new process at the time.

We did our own internal design instead of buying off the shelf silicon.

We're bringing up new hardware,

with software that isn't quite done yet,

on new test systems that we're developing in real time.

And that had a domino effect on the whole product.

The design was coming together kind of late.

We were launching in November of 2005 and we did not see our first silicon

from the CPU until February of 2005.

That's just ridiculous.

That's nine months before launch.

That is an absurdly short timeframe.

The normal timeframe would probably be like two years.

And so we're faced with finishing the design

and ramping up production lines at the same time.

We wanted to launch it worldwide

so everybody had it at the same time.

But that's a big challenge because you also need

to have enough units to restock in retail,

so that the countries you do launch in aren't out of inventory.

We need to get our yields up.

And so, we're cranking up production.

At the highest manufacturing output, I remember hearing numbers like a console

would come off the line every four seconds.

But, as we're ramping production, we start to see reports

of these issues that were coming up.

Lots of inconsistencies.

Consoles would fail at test stations.

If you had built 100 of these things,

only 50 or 60 of them would work, which is really, really bad.

Like a real robust yield rate would have been 90, 95.

This was the fog of war that we had to see through,

and that was, is there something wrong

with the design of the product, or are we testing it incorrectly?

Because we were trying to ship in high volume,

there wasn't much time to think about it because there was so much to be done.

One way of dealing with the failed consoles

was to put them into these nice boxes and stack them

so that you would get back to them at some future point in time.

In a way we were kicking the can down the road a little bit.

We were developing what we call a bone pile.

At the height, we created a bone pile that was over 600,000 units deep.

And so it's, it's just like the Lucille Ball episode

where the chocolates are coming off the conveyor belt.

And they're coming off so fast that they can't do anything with them.

That's exactly what was going on.

The thing about building consoles

is Christmas doesn't change, so your schedule is paramount

and there's just so much pressure to get it done by November.

After a hectic leadup to production,

and months of intense troubleshooting,

engineers finally managed to solve the technical issues that had plagued the 360.

As consoles started to pass QC, the team was finally able

to chip away at the bone pile, in an effort to meet the demand,

which, at the time of launch, was ravenous.

Good evening, everyone!

So who here is ready for Xbox 360?

I'm outside the Best Buy in Midtown.

It's raining here in New York but these gamers don't care.

They've been out here in the rain since early this morning

and they're not leaving until they get an Xbox 360.

Finally!

When the Xbox 360 launched there was a palpable excitement for this console.

The Xbox 360 finally got out of your dreams and into your car.

Microsoft had their fingers firmly on the pulse of what gamers were expecting

and they clearly had a vision of what gaming would be for the future.

We got in with something that was unique and revolutionary.

A gorgeous design, the concave elements of the 360.

It really felt like in some ways that Xbox had actually just arrived.

This new world of online.

This new world of social engagement.

This new world of building communities.

Ohayou gozaimasu!

We at Microsoft had absolutely nailed that experience.

The demand was really, really high.

We were selling every single unit we could ship into the market.

I know there are a lot of fans out there that want a 360,

there's a shortage out there, you know, is that a marketing strategy

or can you not produce enough?

- What's the real story on that? - We are making as many as we can

twenty-four hours a day, seven days a week, we are flying them in.

Ultimately, we got through our challenges of production.

And we just needed to be able to catch up.

By hitting the market a full year before PlayStation 3,

Xbox 360 had a head start on the competition.

But Sony was still the undisputed industry giant.

And they had every intention of keeping it that way.

It was the year after we shipped, when PS3 was coming out.

We were paranoid.

Sony had such credibility that they had cultivated

from the PlayStation 1 to the PlayStation 2,

so they were riding on this tidal wave of success and goodwill from gamers.

Coming off the PlayStation 2, Sony had done everything right.

The most successful platform in game-industry history,

and really just needed to stay to the playbook.

In contrast to that, you just witnessed

Microsoft coming to market at the right price,

a year before you're able to come to market,

so you know you're facing formidable competition.

PlayStation 3 is the best-of-breed computer-entertainment platform.

PlayStation 3 was positioned

as a premium product from the get-go.

This was going to play games, but it would also play Blu-ray discs,

so it was seen more as kind of an entertainment machine.

We knew they were going to be somewhat arrogant.

The next generation doesn't start until we say it does.

And they would price their console to where they felt they needed to have it,

because they felt that they were untouchable.

This is sort of pre-live streaming era,

and a bunch of us were huddled around one person's laptop,

like a 15-inch laptop screen, streaming Sony's press conference.

And then they dropped the price.

In North America, the PlayStation 3

will be available at retail for $599 US dollars, $659 Canadian.

Wait a minute. Did... $599?

$599.

Nobody was prepared for that.

Back then, consoles didn't launch at those kind of price points.

It was like, holy cow, we just got handed this generation.

We were high-fiving each other, people were crying.

There were just all these ways that Sony had put their own foot in their mouth.

Sony said it would be a privilege for people to work extra hours

to afford their overly-priced console.

You have an over-engineered machine,

that's gonna be incredibly expensive to manufacture.

And that opened a window for Microsoft

to be able to soft of say, "Hey, like we have a great system

that's gonna play all the games you wanna play.

We've got better online, for cheaper."

Thank you very much, and have a great show.

Becoming CEO right after the launch of PlayStation 3 was like

being made captain of the Titanic, right after it hit the iceberg.

After Sony's announcement, we could not wait to get on stage the next day.

Couldn't be more excited to be here

because we're delivering the next generation of gaming

right here and right now, with titles that are nothing short of spectacular.

We had a lot of PlayStation fans, and even Nintendo fans

who were coming to Xbox, because we had the best games,

we had the best system, we had the best online network.

We led in every key aspect.

With the help of our incredible partners,

we're delivering on that vision with Xbox 360.

With a high-definition gaming experience

more powerful than anything else in the industry.

Yeah. We were riding high, we were celebrating,

I'd say the morale was extremely high.

We had so much pride in this product.

Everything was great.

And then, the storm hit.

Before launch, engineers had worked around-the-clock

to fix 360's early technical issues.

But, by June 2006, there were reports

of an entirely new, never-before-seen problem.

Distress calls flooded into Redmond.

Something had gone terribly wrong.

It was in the forums and I started to notice that something wasn't right.

There was a lot of chatter about console failures.

Dude. What?

Your Xbox.

You might want to take a look at it.

Oh, [BLEEP]! Oh, oh, oh, oh!

Over time, we kept hearing more and more about it.

We'd go to a launch event for a game or we'd go to meet with games journalists,

then they would all start talking to us about it, like,

"Before we can talk about new features, we want to know, is this fixed?"

But we had no sense of how big of an issue it was.

We didn't even know how to deal with it, and then we saw more reports of it.

Microsoft have been in the news with their latest computer system,

but it seems the last big product they launched can have some problems.

That's the first time I've seen this There it is.

Mother [BLEEP]!

The Xbox 360 had a really cool feature

where there were four green lights around the Xbox emblem.

Each of those lights corresponded to a specific controller

and so that's how you knew what player you were in the game.

We also used the ring to tell people when there were issues.

It's like the check engine light on your car.

And this is what we called a core digital error.

And this was an indicator of, the system detected a major issue.

The error state was just that there was no communication,

so the machine was just basically telling you I can't do anything.

This would show up as three segments in the ring being lit red

which would come to be known as "the red ring of death."

It's the red ring of death.

Red ring of death.

I got red ringed.

Uh, everybody got red ringed.

What the [BLEEP]? Are you kidding me?

When that mother red thing come up

and then the whole game freeze and mother

be like, "Man, what the is going on?

We can't play. What's going on? Your doing that too?"

It was, it, oh my God. It was terrible.

No! Red ring of death! Again!

We have no Xbox. I'm calling support.

You wait on hold for a while.

They let you know they really appreciate your call.

You wait on hold a little bit longer and then they go,

"Okay, we're going to get you a replacement unit."

It doesn't show up for a week.

All the enthusiasm's gone, and then here's the new console and it was just like...

Wow.

This is the fourth Xbox.

Microsoft.

Effectively, the failure rate was near 100%.

It just became an epidemic.

♪ It was the Red Ring of Death! ♪

♪ Console's hotter than a dragon's breath! ♪

♪ It was the Red Ring of Death! ♪

No fricking way!

♪ And I'm so pissed off! Grab the phone! Dial tone! ♪

♪ Calling Microsoft! Now they'll see the dark side of me! ♪

♪ I'm on hold! ♪

♪ It was the Red Ring of Death! ♪

The glitches that went down with Xbox 360.

I was mad as

I'm like, get this fixed or I'm leaving.

I'm joining the enemy.

It was simple as that.

♪ It's a faulty piece of manufacturing from Redmond Washington Microsoft ♪

I feel kind of sorry for it.

Not really. It deserved it.

It's a big deal because, it's just sort of the passion

that gamers have for their hobby, like, you don't want to be away

from your console any longer than you need to be.

We felt the customer's pain.

I had three boxes replaced, you know, personally at my house.

And it does make you think, "Okay, I work here, and this experience

is not a pleasant experience, in sending your Xbox back."

Microsoft's going to ship you a cardboard coffin,

and that's what gamers were calling them online.

"Did your cardboard coffin arrive?"

I finally got my coffin.

But hopefully I'll get him back.

And you'd put your 360 in it and ship it on back to Microsoft.

I remember going out to the curb and like meeting the UPS guy

and looking in the back of the UPS truck

and seeing wall-to-wall, you know, Xbox returns.

The fact that it was happening to more and more people,

and Microsoft was shipping a lot of hardware.

That just combined to this feeling, that, hey, like,

are you guys really taking this seriously?

They're continuing to sell defective hardware,

so a consumer could walk into the store today,

buy a 360, take it home, and it's a ticking time bomb.

Is there any speculation out there what the problem is?

Um, there is a lot of speculation but, because well, among other things,

there are 500 million transistors and 1700 parts in each of these boxes.

- Mm-hmm. - So the speculation could go anywhere.

Whenever we had new game launches

or new system updates, I would be out,

meeting with the top games journalists, showing them all the new stuff,

and I'm trying to sell them on the future

and they're like, "Dude my console's not working. Like it's broken."

For those who have experienced

the flashing red lights, what causes this exactly?

That's kind of part of the problem Kevin, Microsoft has been very vague

about the specific causes, they won't cite any specifics,

they won't say exactly why.

We didn't have all the answers at that time.

We were trying to figure this out.

Do we have a heat problem?

Is the solder in, key components in the motherboard,

is it cracking up and drying out and we're losing that connection?

We just couldn't figure it out.

It's a long process.

You had to test it at the board level, you had to test it at the system level,

and then you had to test it in a rack level, and, we had, you know,

almost a million of them sitting in our bone pile.

We'd fix the ones in the bone pile.

We'd send it back out to the customer.

And it turns out that wasn't the problem, and it would break again.

And I'm saying, "Man, this is not going to end."

After the third or the fourth issue that we ran into,

I remember thinking, "Hey, maybe we're in over our heads."

When we got to a point where we said we're not figuring this out fast enough,

we made the call to shut down production.

We went line down at the factory.

We wanted to figure out how to solve it

before we built any more units to go to customers.

It stretched every bit of our imaginations to try to figure out

exactly what was going on and how to fix the problem.

This went on for months.

These were the darkest days of my career.

Are people going to now go out and buy PlayStation or a Nintendo?

Are they going to leave us as a brand?

Every day you weren't gaming was a bad day for you.

You trusted us and you'd invested this money in us and we let you down.

Not gonna work.

This was an incredibly, incredibly trying time.

You know, people use phrases like you figure out what people are made of.

Having gone through it, I can actually say, that happens.

It's a thing. It isn't just a phrase.

Todd had to manage the very complex process of what we call root causing.

Until we knew what was going on.

2006, 2007, I dedicated a lot of my life to this Xbox in order to fix this problem.

The breakthrough came when we understood that the connections

that were being broken were not located on the motherboard

but they were actually located inside the components.

The problem was, a connection was breaking.

The reason it was breaking was thermal,

but it wasn't because of the peak temperature.

It was because when the unit would get hot and then cold, hot and then cold,

every time it did that, it would stress the connection.

All these people loved playing video games

and so they would turn this thing on and off,

and when it would turn on and off, you get all sorts of stresses.

And just like when you, you bend something too many times

until it finally breaks, that's what was happening.

Once we figured it out, how in the heck are we gonna fix this?

Peter Moore and the executive team faced a big decision

about trying to fix this with all these boxes that were out there in the wild.

This was something that could tarnish the brand,

they needed to do not just something, they needed to do the right thing.

If we're going to save this brand, we need first-class

consumer-service reaction to this.

The credibility of the whole platform really I think hung in the balance.

There was only one way to do this and that is you have to fix every console

for every customer at no cost, no questions asked.

I think we're off to a good start.

And I remember sitting at a whiteboard writing out some,

just some simple math on repair rates, times a dollar, times a customer,

times an amount equals a number, and that number became pretty big.

And I remember feeling in my stomach,

this is gonna be a bigger issue than I thought.

By the time we looked at the cost of repairs,

the lost sales that we factored in, we had a 1.15 billion dollar problem.

Peter had to go to Steve Ballmer and basically say, "Hey, bad news.

I need a billion dollars to go fix this issue."

I'm expecting to be ripped to shreds.

Come on!

It is a make or break situation for Xbox.

If Steve Ballmer does not give Peter Moore the money to go fix it, Xbox is dead.

Like, there's probably no question about it.

To the credit of Steve, and I can still see him looking at me right now.

He said, "Do it.

Just do it.

We'll figure it all out. We'll take the hit."

Microsoft will spend at least a billion dollars

to repair serious hardware failures with its Xbox 360 video-game console.

Over 200 million of this was simply one-way

overnight shipping around the world.

Kudos to Microsoft for stepping up

and putting their money where the red ring of death was.

It was one of the times when I've been proudest to be part of Microsoft

because, we made a mistake, we owned it, and we did the right thing for consumers.

Without that money spent, without them taking the problem head on,

there's probably no Xbox right now.

We bet on our fans and our brand and took the hit.

Take that hit once, do it right.

Don't ever regret it.

When the 360 died on me, I was pissed that it died,

but I wasn't pissed at Microsoft.

I just really wanted to get the 360 again

and start playing again because it was just awesome.

It was frustrating but they had hooked us.

So when you hook somebody, you know, you know they're not gonna leave.

They're gonna work with you through difficult times.

That was a good sign that people loved the thing that you're building.

But, even a billion dollar mea culpa

may not have been enough, had it not been for two x factors.

A library of celebrated game titles.

And support from game developers

who loved how easy it was to program for the Xbox 360,

and saw in it the potential to take gaming to places previously unexplored.

Gears of War, at the time, was the best-looking game ever made.

And it became this poster child for HD graphics and HD fidelity.

Like, this is a game that people are gonna immediately gravitate to

and go "Oh my God, I can't believe the 360 looks that good," especially when they

compare it to PS3, because this game looks better than anything on PS3 right now.

It was the fastest selling Xbox 360 game.

It sold like a million units in the first couple of weeks,

and that really propelled the 360 in a big way..

Gears of War may just be the great hope to turn the 360 into a must-buy console.

It was a very different type of game

for Microsoft, an M-rated game with over-the-top violence.

Everyone loved the signature weapon, the chain gun, the Lancer.

Gears of War was about appealing to a hardcore gamer.

The people that play Gears, they have so much passion in it.

People get tattoos and it's just a deep connection

they have with the franchise and the game,

it's unlike any other franchise that we have.

That was satisfying.

And all of a sudden you see

this tide turn of every publisher is then developing for the Xbox 360.

We had secured a lot of big games for Xbox 360, you know

we published titles like Mass Effect.

We had Splinter Cell from Ubisoft of course.

We really had this incredible portfolio of games, we were the shooter box.

Call of Duty was a franchise we had bet on early,

it was a PC franchise, and we really established

Call of Duty on the console in a big way.

PETER MOORE:Kameo had this gorgeous, colorful game.

It was all about frame rate, it was about smooth visuals.

Forza was built as a direct competitor to Gran Turismo.

We're gonna go off and we're gonna build a great epic big racing simulator game.

You had cars that had amazing reflections of the sky.

They had reflections of other things.

You had particle effects.

You had a lot of things that just made it look much more real than any other game.

To this day my son can recognize cars by the engine sounds

because he played so much Forza.

If you look at Xbox 360,

that was a moment where we got it exactly right.

It was just an incredible run that I don't know

that has ever been topped in the history of gaming.

And then, you know, at the center of it all was Halo 3.

It had been 3 years since Halo 2

smashed industry records, and Halo fans were clamoring

for the next chapter of the epic space saga.

I think that we were really surprised by the success, the huge success of Halo 2,

and so as we were leading up to the Halo 3 campaign, I think we did kind of

look at it all up from a marketing team, as more of a Hollywood moment.

With Halo 3, we want to get out in front and make people aware that

video games are not something that are just for the boys.

Video games have come of age.

An exciting day for video-game fans, and for Microsoft.

Master Chief is back in the most anticipated video game ever, Halo 3.

Thousands lined up to get the final installment

of the trilogy when it went on sale at midnight.

I got here 6pm yesterday, been waiting here ever since.

Halo 3.

What a massive launch event that was for us.

They have one million pre-orders which is pretty much unprecedented.

Halo is projected to sell four million copies its first 60 days.

More than twice as many as the nine runners-up combined.

It's only the biggest game ever.

We were no longer some like tech company trying to be in video games.

We were launching one of the biggest entertainment properties of all time.

Yeah!

Halo 3 embodies our vision for the future of entertainment.

The franchise spawning everything

from clothing, to action figures and rumors of a Halo movie.

Halo 3 really started to make gaming a mainstream cultural phenomenon.

Its first-day sales could outdo

not only the final Harry Potter book, but the debut of Spiderman 3.

When everything was tallied we had generated over

170 million dollars in revenue in the first 24 hours,

setting a new record for the biggest day in entertainment history.

It was just an amazing moment.

It was one thing after another, we had games, we had Time Magazine,

everything started clicking and it felt like, something's happening.

We delivered the right content, the right hardware,

the right games, the right price, and we were showing massive momentum.

The ship had sailed, and sailed magnificently,

and kept sailing full-steam ahead.

Only a week ago Peter Moore took the stage

in Santa Monica, California for Microsoft's E3 press event.

A mere 7 days later the man in charge of the 360

and the Games for Windows division has decided to move onto EA Sports.

I left Xbox, because, I felt like I had done what I needed to do.

Ironically, he'll be replaced by Don Mattrick,

the former president of EA, but one has to wonder,

with the face of the Xbox gone, how will this affect

the 360's standing in the console wars?

Don Mattrick was a really accomplished game developer,

as a kid he wrote these amazing games and he was just like super smart.

Don's really an innovator,

he's a business leader, he's really into the tech.

He really wanted the Xbox to be a product

that could reach a broader and broader market.

When I joined Microsoft, Steve Ballmer said, "Xbox needs

to have more than a two-product lifecycle.

And to do that, we need to place bets, we need to move into new categories,

we need to innovate, and create new hit products,

both in gaming and in entertainment."

When Don Mattrick came onboard, it was more about trying to appeal

to a completely different audience and a very broad audience.

So, there was this one meeting where he shows up,

and he says, "We're not going for 30 million consoles,

we're going for 300 million consoles."

And, the strategy behind that was, we need to make casual experiences.

When the Xbox 360 launched,

we had Xbox Live built in, we had this

very basic blade for marketplace, and we had only game content.

One of the things that I had been tasked to do

was go get us some entertainment content,

which was an entirely new idea at the time.

We started doing deals with studios.

We were excited when we had one movie

and then two movies and five movies and ten movies.

Microsoft's Xbox will transform into a next-generation entertainment hub.

Users will be able to navigate through music, movies, television shows.

For the first time we're realizing that streaming

and digital-video content was gonna be a big deal.

And then we had Netflix come on.

Xbox 360 was a big part of putting Netflix in the living room.

At the time, Netflix was a mail-order DVD catalog service.

Nationally, Netflix moves more than 1.5 million DVDs a day.

There's 40 of these warehouses

- around the country. - Right.

So that nearly every customer gets next-day delivery.

Netflix hadn't done anything with digital streaming,

we thought, "Why don't we call them up, see if they would be interested

in distributing their content through Xbox 360?"

We definitely accelerated their growth because we introduced them

to tens of millions of devices that were connected to a TV, overnight.

It's a great opportunity for Xbox members to never leave the sofa,

you know, watch movies from Netflix, play great games, it's a great platform.

And then it's like, what should we do next?

Well we brought HBO, we brought Twitter, we brought Facebook.

Today that may not seem that revolutionary,

but at the time, the idea to be able to do

that all in one box had just never been done before.

Our Xbox Live community, the digital streaming services,

the gamertags, the achievements, the experiences, they were things that

we would hear consumers say they loved, and competitors say they were envious of.

Xbox Live really proved that people wanted digital content.

I think that created this sort of ripple effect that affected Nintendo.

They knew that they probably needed to shift on how they did some things.

They weren't just going to give you another console,

they were gonna give you a console that did something different.

This is Mike.

By day, he's Mike the businessman.

But, when he picks up the new Wii remote

from Nintendo, he's Mike the warrior-superstar-athlete man.

Holiday of 2006, Nintendo released the Wii,

and turned the world upside down.

We're confident because

for pick-up-and-play games there's nothing like it,

for baseball, for tennis, games like that, it's fantastic.

But with the nunchuck, what you're able to do

in a first-person type of game, is a huge step forward in control.

Nintendo came out of left field with a device that wasn't

based on technology, it was based on a simple

entertainment experience of being able to play a game

without being a button masher on a controller.

It really resonated with a mass audience, a wider audience, all of a sudden,

parents are playing video games with their kids again.

Suddenly you heard people talking about video gaming

as something that was good for you.

Wii Fit is about bringing fun into fitness.

Video gaming as

an approachable thing that everybody could do.

They went after senior citizens, they went after female gamers,

they went after people who are not traditionally gamers.

Clearly they expanded the audience

and they took gaming to mainstream entertainment.

I remember Bill putting a lot of pressure on the Xbox leadership team,

how did we miss motion gaming, what can we do to catch up?

We need to compete, we need to advance our game strategy,

we don't want to do a Wii-mote rip-off.

We want to do our own thing.

Don also had this vision for controller-free gaming.

What would it be like if instead of waving something,

we were recording movement?

We were recording state-of-people, physically, through a camera.

The controller he thought was this impediment

to more people playing games.

Because you had to kind of learn this device, and his view was, like, hey,

if people could just like swat at things or move things, or drive a car like this,

it's kind of crazy, but it's like if you could drive a car like this,

that would make more people more willing to play video games.

We set out to really make the console approachable

to a whole new generation of people.

To a whole new set of people

that wouldn't otherwise think about gaming as something that it was for them.

We had already been doing some technology exploration

where we could map people.

Using depth sensing and RGB cameras

and microphones and stuff, and you could have that

by your television, rather than holding something,

you can still get these similar types of experiences.

The idea that we were gonna use IR kinda display,

projection and reflection,

to measure movement, was pretty magical.

Every step of the Kinect process was

an inventing step.

A lot of this work, we had to figure out how to hack our way into it.

We prototyped probably 30 activities.

We found that the whole-body activities were actually the most fun.

And so that's what we ended up focusing on.

To create something totally new for gamers.

We launched Kinect and it was a game-changer.

I don't think anybody saw it coming.

It was something completely new and unexpected.

- Wow, that's... - So you can see if we wave our hands..

- Oh my gosh. - it's tracking your full body.

- That's crazy. - Now we're playing.

- Okay. - So if you lean left and right...

- Oh! - Jump, jump, jump!

In your opinion John, how does this compare to the Wii and the Wii Fit?

Oh it completely blows it away, and this extends far past just gaming.

It's crazy, it's Minority Report status, that's how I see it.

When I saw the Kinect, I thought, "Oh finally, like this is something

we're gonna use for VR eventually,

it's going to be amazing to have you in the game."

Because it's motion gaming people think oh it's like the competitors,

it is a completely different thing, you have to play it to understand that.

The games were really fun.

It really unlocked a new game experience for people.

Hiya! Hiya! Hiya! Fireball!

We started getting people all cheering and yelling

and you know encouraging the person who's actually playing to try new things.

The idea that, like, you would have people over for dinner

and then afterwards everybody would want to turn on the Xbox

and go play ping pong or go play Kinect Sports

or go play a Dance Central, that just gave Xbox 360

a whole 'nother sense of purpose.

In the first 60 days, we sold over eight million Kinect sensors worldwide.

Kinect was a technological marvel, but it totally fell flat with core gamers.

Kinect didn't work with Halo.

But Kinect was an amazing tool for so many things like research

and how we think about augmented reality and virtual-reality experiences.

It's been fun to watch innovation of computer science

come not from academia or industry but to come from gaming.

And it turned out that Kinect creative community

just went on to do incredible things with this device.

People got into hacking the Kinect early last year.

Smartly, Microsoft responded by welcoming that, and encouraging more development.

People were taking all the IR data and the voice data,

and it was a rich source of creativity for other types of applications.

What is neat is the technology that is used in video games now

and how it can be applied to other things, not just gaming.

And they're calling it the Kinect Effect.

Microsoft's Kinect could revolutionize medicine.

Being used to aid the rehabilitation of stroke patients.

Also by people who work with autistic children.

Kinect today is mostly used outside of gaming.

So, gaming has created this piece of technology

that today drives the industry forward.

With Xbox 360,

we had an amazing product that had finally broken through.

The ecosystem was healthy.

Consumers were engaged in North America and Europe.

It was the top-selling hardware device.

Xbox 360 has been the number one-selling console

every month for the last six months.

It was a pretty great second iteration for Microsoft as a company.

Against all odds,

the Xbox 360 basically won that second console generation.

By the end of that generation I think people had sort of felt

the pendulum had swung from PlayStation dominance to Xbox dominance.

There were more players than ever playing Xbox.

The brand really was in a terrific place.

And there was no chance, there was nothing Microsoft could do

that could possibly torpedo the success that they had with the Xbox 360.

We're about to change entertainment forever.

Again.

Because we're gonna take all that we learned...

In more than thirty years of innovation...

And use it to change...

Television. Television.

- TV. - TV. TV.

- TV. - TV.

- TV. TV. - TV. TV.

- TV. - Television. Television. Television.

- Watch TV. - Team Xbox is on a new mission.

This is it.

Xbox One.

I can't believe...

I cannot believe this press conference!

We've got this vast amount of gamers

that are increasingly loving Xbox,

and we're building great experiences that they've never seen before,

and now we're going to be the connected TV,

so we're gonna have the set-top box for the living room,

and it turned out like nobody wanted that.

Oh hell no, Microsoft.

Hell no.