"The beauty contest"

Ted Kummert, head of the Windows CE contingent, and Dave Riola of WebTV spoke for the other side. But when they started talking, the meeting time was almost out.

"We need to build a product that competes head-to-head with Sony," Riola said. "We should embrace their business models."

The WebTV team described a subsidized console that would cost about $183 and quickly fall to $150 the year after launch. It would have no hard disk drive and would therefore match the other consoles on cost. Only such a console would do damage directly to Sony's business, they said. In contrast to the earlier proposal with non-PC components, this console now included a $20 Intel-compatible microprocessor and a $30 graphics chip from Nvidia. The highest-priced item on the list of materials was $40 for memory chips. But the rest of the bill of materials was complete, down to $2.14 for the cables and $4.85 for screws.

"I'm concerned that we're not trying to take money away from Sony and we're not trying to build a new business for the future," Riola said.

The WebTV box would also use Intel-compatible chips, but it would have a graphics chip that would be useful across a variety of devices, including WebTV, a game console, and other appliances. Consumers could pay extra to get additional advanced television features such as WebTV's Internet service, high-speed Internet access or digital video recording. Microsoft would invest $300 million to design the console, spend another $500 million on marketing, and $200 million to build the machines. This effort could be a joint venture with Sega or Electronic Arts, but Microsoft might go it alone.

Riola said that Microsoft should take advantage of WebTV's world-class chip team to design the chips itself, rather than use technology from PC component makers. He said the console would be successful if Microsoft would throw things out of the PC architecture that weren't necessary in the console space. Kummert said the console could use the Dragon version of the Windows CE operating system that Sega was using. He said Microsoft should fund additional CE-based Sega games, and WebTV should provide Internet service for the Dreamcast in the United States.

"Windows CE is the only environment that provides predictability in the operating system," he said.

This software would be integrated with DirectX 8.0, the next version that Berkes would deliver after he finished DirectX 7.0. Berkes and Nat Brown looked at each other and raised their eyebrows. They were thinking the same thing.

Bill Gates detected the problem. Windows CE had to be made compatible with the upcoming version of DirectX 8.0. He interrupted the presentation and asked who was working on this project. Berkes, who was in charge of developing the latest version of DirectX, said to Gates that he didn't know anything about it. He would need a lot more programming resources to make sure that this conversion would happen and if done it would be a slow process. "It wasn't a credible claim" that Windows CE would be synchronized with DirectX anytime soon, Berkes said. The Xbox team had considered using Windows CE, but they dropped it as soon as they discovered the file size for CE programs was limited to 32 megabytes; they would have had to partition a hard drive into thousands of parts just to make CE run. Hence, the WebTV people didn't have a good software story. They hadn't had the presence of mind or resources on short notice to put together a demo that showed Windows CE working with a new version of DirectX. Gates also hammered the failure of Windows CE in the Sega Dreamcast.

"Tell me who used Windows CE in a Dreamcast game," Gates demanded.

Kummert had to reply that very few game programmers had done so. He and Phillips offered a half-hearted response about why that was so. Gates knew the matter all too well already.

Next Page: "I'd love to attack [Sony]," says Bill Gates

• View blog reactions