"The beauty contest"

The Xbox team countered that the WebTV plan to create a custom graphics chip from scratch would likely take too long to design given the short market window. Jay Torborg, Berkes' boss, thought that was the weakest part of the WebTV plan. Torborg had spearheaded a graphics chip project dubbed Talisman years earlier that ended in failure because designs for the chips ran horribly off schedule. By the same token, the WebTV team didn't believe that the Xbox could produce a version of their operating system in time to finish a box for 2000.

Watching from the sidelines, Rick Thompson of the hardware group had taken a neutral stance in what he called the "peanut gallery." But he looked at the pedigrees of the players. Chris Phillips, Dave Riola and Ted Kummert had game market experience. Mundie and Devaan were high-ranking and seemed somewhat open-minded to Thompson in spite of how the Xbox team felt. WebTV's leader, Steve Perlman, was pretty much out the door. On the Xbox side, Blackley and his cohorts worked for technical stalwarts like David Cole of the consumer Windows group and his lieutenant Bill Veghte.

"These guys were known quantities," Thompson said his thoughts ran at the time. "Ted Kummert's group didn't have a deep keel. They didn't have a proven leader."

The strategy of Ted Hase was coming to fruition. He was beating the other guys by bringing more allies with heavyweight reputations to the fight.

Overall, Gates reacted more favorably to the Xbox team. "There is no doubt we need to do the PC-down approach. If we do anything, it will be more like the Xbox."

He liked the idea that the Xbox would run a broader class of software than the WebTV box, including educational software or productivity software. Gates wondered how the business model would work, and he asked the teams to do more work figuring it out. Craig Mundie asked if there was a role for a machine that didn't have a hard disk.

"I'd love to attack [Sony] from both fronts, but can we really hope to execute on both plans?" Gates said.

He worried that software providers would be confused because there would be "no continuity of message" coming from Microsoft on games. Rick Rashid, an early convert among the executives and head of research, agreed that a two-pronged effort would have been confusing, fragmenting the game developers into camps.

Blackley was surprised that Gates seemed so engaged in the proposal, and he was relieved that Gates was even paying attention, given all of his big responsibilities, not the least of which was the government's antitrust case aimed at breaking up Microsoft. Gates had other worries as well. He wondered aloud if America Online planned to dive into the games space. AOL had already talked about an AOL TV service that it planned to launch with cable TV companies like Time Warner, its future acquisition target.

At the time, Blackley got the impression that Gates thought of the Xbox as a pet project, and a WebTV representative agreed that Gates seemed biased.

"The Xbox team had the right idea," Gates said later. "Empower the artists with a platform that inspires them to do amazing work."

Blackley saw from Gates's questions that the company had to work through a lot of problems quickly if it was going to get a box out in 2000. Bachus was disappointed that he didn't see a flash of the legendary Gates temper. "I was looking forward to classic Bill," he said later.

But the Xbox crew had convincingly covered many points. "Our argument was to start where the company was strongest, with PC technology and PC software code," Bachus recalled. Microsoft faced an immediate threat with the PlayStation 2, and it needed to do something to stop Sony from taking all the hardcore gamers. If they failed to do that, then none of the other things would matter. And if WebTV's box spent its time doing a mix of functions, then it wouldn't do games well enough.

"Our goal needs to be to contain Sony," Gates said.

But Gates left a glimmer of hope for the WebTV team. He said he wanted a "common graphics architecture" between the PC, the Xbox and WebTV. He said this would enable devices in the home to take advantage of high-bandwidth connections. This fateful suggestion turned into a new form of the old Microsoft strategy tax, slowing down the Xbox again.

"The strategy tax was very real," recalled Eric Engstrom, the former Microsoft "Beastie Boy" who had created DirectX and a few other Microsoft projects before leaving to start his own companies. "You never knew when the tax collector was going to come. You could be halfway done and then get hit with the tax bill."

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