What Microsoft CEO Steve Ballmer did for Xbox — and what his retirement means for its future

Steve Ballmer’s decision to retire as CEO of Microsoft in the next year will have a big impact on the future of the Xbox gaming console, as he has played a key role in all of the major decisions about the company’s highly successful foray into the video game industry.

Ballmer isn’t much of a gamer himself, and he always had trusted lieutenants such as Don Mattrick (former president of the Interactive Entertainment Business division) or Robbie Bach (former president of Entertainment & Devices) to run the show. It is hard to tell what direct impact he had since he was always part of a chain of decision makers on key Xbox moves. But he was there from the start, and based on the reporting I did for two books on the Xbox, his influence was felt by those who built the business.

In the history of Xbox, which we have chronicled extensively, his name doesn’t come up on many of the key decisions. Still, while Ballmer wasn’t a fan of the console at the start, he didn’t kill it off. He stuck with it during the worst of times, and now he can look back on how it has been built into a gigantic success. Xbox Live online membership has grown to 50 million, Microsoft has sold more than 70 million Xbox 360s, and the Xbox line is now consistently profitable.

The early days of Xbox

Above: An original Xbox prototype

Image Credit: Microsoft

When Xbox was getting off the ground in 1999, Bill Gates was chief executive and Ballmer was president. Gates had the vision to make an outstanding product for consumers, but Ballmer was a foil to that dream. During the discussions, he focused on whether Xbox would be a good business, rather than whether it would be a cool product. That kept the Xbox team grounded in reality, but it also held it back in a number of ways.

“In the early days, Bill was our biggest advocate, and Ballmer was our biggest enemy,” said one Xbox founder, who asked not to be identified. “He thought a subsidized piece of hardware was bad for business.”

But in video games, consoles are typically sold at cost or at a loss, and companies made money on the software — the games. It’s the classic razor-and-razor-blades model — one that was new to Microsoft. Gates had seen failures from many half-steps into gaming, so he wanted to focus on making the coolest product that would grab market share rather than short-term profits.

It’s not clear when Ballmer came on board with that idea. But Gates was the boss.

Ballmer appointed Rick Thompson, then head of Microsoft’s hardware division, to explore the possibilities of how Microsoft could enter the games business in a meaningful way. When Thompson balked at first, Ballmer called him into his office. Ballmer was swinging a baseball bat into his own palm, trying to hammer home a point about how important the job was. Thompson accepted, and he went around to the different game companies, asking the likes of Nintendo and Electronic Arts if they wanted to be acquired. As it performed this due diligence, Microsoft lost critical moments in the market as Sony raced ahead.

Thompson concluded that the first Xbox would likely lose up to $900 million over eight years and would be a “Hail Mary” play. But Gates and Ballmer decided to go into the business anyway because it was strategically important to Microsoft’s future, and it would stop others like Sony from taking over the living room and supplanting the PC as the key entertainment device in the home. Ballmer also insisted from an early stage that the Microsoft executives find a path to profitability. The reality of entering the industry was far more costly than expected as the first Xbox lost somewhere around $3.7 billion over the first four years.

But Ballmer and Gates viewed the toehold they grabbed in the games market as a strategic success. They had diversified Microsoft beyond the Windows and Office franchises and overtook Nintendo in the numbers of console units sold in their first attempt. Gamers loved titles like Halo: Combat Evolved. While Ballmer wasn’t a gamer, he and then chief Xbox officer Robbie Bach had provided the backbone and credibility of Microsoft for gamers, developers, and publishers to believe that the company was in the console business for the long term.

That was critically important in the early days as the Xbox started as a rogue effort within Microsoft by a few game “green berets” who didn’t have much clout otherwise within the corporation. Ballmer and Gates encouraged founders Seamus Blackley, Kevin Bachus, Ted Hase, and Otto Berkes to continue building the platform, and they gave their blessing as the project won support from former head of Microsoft Game Studios Ed Fries and former MS Office head Robbie Bach.

Some of the Xbox founders recalled how, even though Microsoft had billions in cash, they had to find a way to make money. So Microsoft chose to keep the Xbox expenses under control. The company grew the division quickly, then cut back once the scope of the business became clear. Even though Microsoft had all the cash in the world, it had to use it to deal with different enemies — Google and Apple — and so appeared to be outspent by Sony and Nintendo on games.

“Ballmer was the skeptic to Bill’s optimist,” said one longtime Xbox member. “He was as far outside the gamer culture as Microsoft had among its executives, so he didn’t have the emotional angle to understand why we thought it would work.”