"The beauty contest"

The PlayStation 2 didn't have a hard disk, though Sony was considering one as an add-on device. The WebTV team noted that Nintendo had planned to introduce a hard disk for the N64 as an add-on peripheral, but found it would cost as much as the box itself. But Ed Fries piped up and said that the hard disk drive was key to online gaming and it represented the next evolution in console hardware.

"I believed the hard drive would fundamentally make online games possible, and make stand-alone single player games more interesting," Fries said. "It was just the next evolution of console hardware to me."

The endorsement from Fries caught Gates' attention. Like Fries' boss, Robbie Bach, he trusted the opinion of Fries, who had earned respect because he had made so much progress in growing the games business. The hard drive could store far more data than the 64 megabytes of DRAM chip memory in the rest of the box, or the mere 40 megabytes in the Sony PS 2. As such, it could store much richer graphic details. The hard drive was also 100 times faster at fetching data than a DVD drive fetching data from a DVD disk. Hence, game developers would be able to create extremely detailed models, and then transfer that data from the DVD disk to the hard drive as a cinematic clip was playing so that the player never noticed any delays. Such details could make game environments far more interactive and malleable than in current games.

Other chunks of the hard drive could be used to store saved games, so that users could pick up where they left off without having to plug a memory cartridge into the box. And the hard drive could store new levels for a game that could be downloaded from the Internet through the fast Ethernet connection in the back of the box.

Gates said he felt like the hard disk would help set the machine apart from the other consoles. Some debate focused on whether Microsoft would get more mileage by adding more chip memory, increasing it from 64 megabytes to 128 megabytes, rather than adding a hard drive. But Gates said he agreed with Fries. Blackley showed a demo of Bleem! software that could take a PlayStation game and run it on a PC to prove that the PC technology that would be used in an Xbox would be able to run console game code.

The WebTV team also said that there was no way that Microsoft would be able to create an Xbox operating system in time. But the Xbox team said they would adapt Neptune, a new version of the Windows 98 operating system, by focusing it on what was needed for gaming. The system would be less crash prone because the hardware would be stable and it would rely on known PC tools. The market target was the 29 million 16-to-26-year-old males who were the fanatical core of gaming.

The Xbox team by now expected their project to cost $500 million, but they really had no good numbers supporting the estimate. A "business model" spreadsheet in the presentation showed that the team expected to sell 1.8 million Xbox consoles in 2000, with steady improvement every year leading up to sales of 30.2 million consoles in 2005. Microsoft itself would lay out $226 million in expenses in the project's first year, not counting the costs its manufacturing partner would incur. Microsoft did not plan to charge royalties to developers, and this was considered a perk that would get developers to defect from Sony, which charged them $7 a game. Hence, Microsoft's cumulative loss for the first year was expected to be only $169 million. But by 2005, Microsoft's cumulative profit over five years was expected to hit $913 million. Microsoft's market share in the business could grow from 10 percent of annual sales in 2000 to 35 percent in 2005.

The early plan wasn't all that ambitious. It called for only 50 employees at first, largely because Microsoft would license and subcontract most of the work to others. The numbers weren't really an educated assessment of what it would take to succeed in the games business today. Rather, the numbers showed how naive Microsoft was in its initial expectations as it marched off to battle -- much like the troops in World War I. It expected to encounter little resistance, not prolonged trench warfare. Don't worry boys, we'll win this and be home by Christmas.

For much of the meeting, Gates listened quietly. He asked how easy it would be to convert games from the PC to the Xbox and vice versa. Blackley said it would be easy to switch between PC games and Xbox games because of the common DirectX architecture. Game developers already knew the DirectX tools that would be used for Xbox games, so there was no tiresome learning process for them. The team hadn't really decided exactly what it would put inside an Xbox operating system and what subset of PC applications an Xbox would be able to run. The Xbox team figured they had to say the box would be PC compatible whether or not that was really the case in the end. Some of the team felt the box shouldn't run Windows, but they weren't prepared to tell Gates that yet.

"When we talked about PC-compatibility for the Xbox, that came from the fear of Bill," Blackley said.

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