Naturally, Yusuf Mehdi, chief marketing officer for Microsoft‘s game business, thinks that his company won the battle of the press conferences at the Electronic Entertainment Expo (E3). But it remains to be seen whether fans will opt for Microsoft’s view of the future of gaming and how tablets and smartphones fit into it. The company introduced its Xbox SmartGlass app, where users can tap mobile devices and use them to control a game console and queue up their entertainment. It’s a unique vision now, but Mehdi believes it will be a shot in the arm for Microsoft’s ambitions in the home. Microsoft’s SmartGlass will work not only with Windows tablets and phones, but it will also support usage based on Apple iPad or iPhone. We caught up with Mehdi at the Electronic Entertainment Expo (E3) in Los Angeles. Here’s an edited transcript of our interview.

GamesBeat: How do you feel you guys did on the scorecard, what do you think about that? As far as the press conference…

Yusuf Mehdi: I actually like to get people’s feedback. I felt like we did a good job showing what we have for Xbox 360 this year. And I feel like, even after seeing the announcements for other people, it reaffirms that there would never be a better time to be an Xbox 360 owner. I do believe we’ll have, arguably, one of the best lineups for new games on 360 that we’ve ever had in the history of the 360. We’ve really broadened into entertainment in a way that our competitors really didn’t spend any time on. And we’re doing it in a pretty unique way. Sports, more content providers, training programs like Nike Fitness. And then our SmartGlass announcement and approach seems to have gotten a lot of people excited. Both here in this industry and also in the creative community. I think that’s very unique, relative to the competition. You add those three things up, and you say, you get all of that value this year if you’re a current 360 user, you don’t have to pay for any of that. That’s all great new value. I feel like we did well for what we wanted to talk about.

GamesBeat: I thought that the variations on this sort of touch and tablet theme are very interesting here at the show. Do you think that SmartGlass works better? The advantage I see is openly embracing what’s already in the hands of a lot of people out there. What, 60 million iPads have sold? If it works with that, then that’s good. Do you want to buy a Vita, right? If you’ve already got an iPad? Do you need this dedicated tablet? I guess you do, but do you want two of them? So Nintendo is in an odd place there. Can you talk more about your interpretation of the tablets?

Mehdi: I think you could say we were lucky, or we had great foresight. But I think the decision to take an approach that says, embrace the world of smart devices, the billions of smart devices that exist today, and build a platform and a technology and a user experience across those, is absolutely the right call for the consumer, for the industry, and for us. Because what’ll happen is, I think we’re going to get traction here that will expand the Xbox business in a dramatic way.

What SmartGlass really does is it creates a new creative canvas for three-screen entertainment. Something that’s not happening today. It happens today in a kind of sneakernet way. You’re watching a TV show or a movie or playing a game, and in a moment, when there’s moments, you go to your device that’s handy. We know that people are playing with tablets or PCs while they’re watching TV, or they’ve got their phones in their pockets. What we’ve done is create a platform where the content creator can actually program to the devices, the devices are smart, and they are aware and they’re listening to the broadcast from the TV, and then they light up. That’s why I wanted to make sure you had seen it, if you haven’t I should show it to you. But then the second thing is that, like all these things scale is critical to creating the breakthrough experiences. If you don’t have enough volume, if you’re just saying, hey, I’m starting now, please go buy another tablet device that is single-purpose, you won’t get scale, you won’t attract enough content providers. One thing that’s very clear in this great world of gaming we live in is that the pace of innovation has accelerated. You have a lot of social-mobile-casual development going on. You have many more people coming to the gaming world, which is exciting. That also puts a lot of pressure on, okay, how do you embrace, how do you stay on top of that? SmartGlass, to me, is this fantastic bridge between… Let’s embrace the world of many people coming to gaming and then tie it to our overall story of premium entertainment. I think that’s what… You can call it lucky, you can call it great foresight, but we built it to land in this way.

GamesBeat: If you do work with existing smartphones and tablets, the drawback I see is what Nintendo sees, which is, if you want to use that tablet for realtime gaming, it’s harder to do than with their purpose-built Wii U tablet. It’s going to work in real-time to control the games. So… Here I can see you say, using it as the remote control or otherwise navigating around websites like that while you’re watching TV… But playing a game, it almost seems like somebody’s going to have to fix the latency problem with the tablets and the smartphones.

Mehdi: Well, there’s… What latency problem has Nintendo solved with their device?

GamesBeat: I guess they’re still using Wi-Fi, or…? I don’t know.

Mehdi: That’s exactly what it is. It’s just an input device. You’re going over wi-fi or you’re going over a cable. That’s all there is for latency. So there’s no latency issues.

GamesBeat: Then I guess you get to… They have thumbsticks, right?

Mehdi: We have some great thumbsticks on our controller. Did you play a lot of the games on their…?

GamesBeat: Nintendo’s? Yeah.

Mehdi: I think… One of the things that’s interesting is, when you’re playing a quick, realtime, twitch game, how much can you look up and down between the screens? That’s an interesting question. We’ve put a huge amount of design into how we do our controllers to understand user experience, and there’s a lot in there that I think.. This controller has a lot of science behind it, about why it works great for different types of gaming. In other cases, when you do want to have cross-screen sharing, that’s where I believe this approach is actually better, because what we’re doing is embracing it as truly a supporting screen. Not as the thing you should be looking at. Therefore, it needs to light up, it needs to notify you, it needs to actually provide content that’s relevant in that example. So I feel pretty good about that. I certainly don’t think there are any latency issues there. You can use any device for control, for tabbing, for browsing, for watching movies. It’s got a richer platform for things.

GamesBeat: And then there’s more, say, competition emerging too, like say Samsung with a Gaikai-enabled TV set. The TV and a controller and no console, cloud gaming… It seems like that is… And LG with OnLive as well. It seems like that’s more competition emerging.

Mehdi: It could be. It’s not today. I’ve looked at a lot of those things. I’d be interested to talk about some of the details on that. To actually run a full-time game, there’s not enough aggregate bandwidth anywhere in the infrastructure, in pretty much any different city around the world. So it’ll be many years before you could do a full triple-A console game. The bandwidth is not there. And it’s not a fixable thing. It’s aggregate bandwidth. It’s not bandwidth in the home. And then there’s the latency issue you talked about. There, there is a latency problem, because you’re not going to the device, the controller, you’re going to the cloud. We’ve done a lot of research, and once you pass 40 milliseconds of latency, the time delay is sufficient to have consumers saying, the game’s not playable. So those are our problems. It may get solved at some point, but it’s going to be many years. And the flip side, when you talk about cloud, there’s a lot of other parts of the cloud that we do believe in, and I feel like we’re invested in leading in a big way. The notion that all your achievements, your gamerscore, your IDs are all managed up in the cloud. So when you go to a friend’s house, you download your tag, it downloads all your data. Games on demand, the Arcade, DLC content that we’re publishing, all of that background cloud work that makes your games feel much more like a service, there we have a full-fledged, at-scale effort running. I feel pretty good about that. I think that, realistically, the other solutions are concepts. They’re not yet in a market that can do any of those things.

GamesBeat: I guess Apple has their event next week, we don’t know if they’re going to do something more, they may get a TV out at some point. Does that also represent competition you can think about? And also, do you have any worries if they would block anything you’re trying to do with SmartGlass?

Mehdi: So on the first part of your question, because I don’t know what’s actually going to be announced. There are lots of rumors. I have no idea what’s up. We’re in a very fortunate place at the moment, in that we actually are the most popular device in the living room for entertainment. We have 67 million Xbox consoles, we have a great run rate, all attached to the TV, all operating at high scale doing entertainment. Some of the stats you probably saw because you’re up on all the details, but we’re up to 84 hours a month per Xbox Live Gold user. More of those minutes spent on non-gaming versus gaming. We have really become a full-fledged entertainment service in the living room, and continue to grow. And you take things like the Kinect and SmartGlass, and it’s a very different bar than I think what anyone else has been talking about in terms of entertainment usage. So I don’t really… It’s always good to hear what comes, but for the moment, for the plans that we’re trying to draw, I feel pretty good that we can do that. What was the second part of your question?

GamesBeat: Whether they would block you guys, if it was not in their interest…?

Mehdi: Ah… I mean, I don’t know. They can certainly do whatever they wanted. I don’t think so. I think in this case, SmartGlass is frankly just a big win for everybody, because we make all your devices better. They work together. It’s a value prop to say that your tablet, whichever tablet you have, can help make your TV-watching experience better. If they say, well, we don’t want our tablets to be that good, we’d rather have your Windows tablets look better, that would be fine. I doubt they would do that. I think we’re okay. There’s enough devices out there, I think it’s okay.

GamesBeat: I assume when more Windows tablets and smartphones come later this year, that you’ll also have some advantages there.

Mehdi: Yeah. Part of what you’ll see is, the way we’ve designed the Metro interface for Windows 8, it was independent of our SmartGlass effort, this just is fortuitous, but… You can dock Windows… One of the things we do with SmartGlass is we create a remote control application. You can imagine now, because we’ve seen this before, you’re remote controlling the TV with a little pane here, maybe the size of your thumb, but you can still have content on the right. You can still be working while you control the TV or see what’s going on. These are all things that are kind of uniquely enabled through Windows that other operating systems haven’t done yet. They could, but they haven’t. I feel that it’s a win-win for Windows and for our broader story.

GamesBeat: Sony’s taken some shots at you guys about how you are straying from games? They say that they showed all these brand-new IPs and that they had more to show than Microsoft did…

Mehdi: Two IPs, right? I think they showed two new IPs. I think we showed at least three or four. We showed LocoCycle, Wrecketeer, Ascend, Matter… All world premiere first-time exclusives. Look, I think… There’s no question that we are focused and going to really excel on gaming. And I think we will… We’ll be the only platform that has the best first-party shooters this holiday. The only platform. Because we’ll have Halo 4 and Battlefield and we’ll have Call of Duty with exclusive 30-day download. Those are the three hottest, number one shooter games, they’ll do more volume than any other effort. That’s only Xbox 360. And then Gears of War as well. So if you take all those… I could kinda go down a few like that. I think anyone who’s a core gamer knows that this is a great place to play games. And then we also have the Xbox Live Gold multiplayer, which continues… If you like multiplayer, which a lot of people do, it’s still the place where people go to play multiplayer.

GamesBeat: Xbox Live Arcade is moving along pretty well? Are you happy with some of the results that you’re getting?

Mehdi: Yeah, it’s continuing to grow. I think it’s good, we like it. I think today we excel in core gaming, and I think we really want to broaden to many devices. I think part of, again, what’s great about Xbox is, this holiday we will be the gaming service on all of the Windows 8 PCs that go out, as well as the music service. Then you’re going to take our audience base of 67 million and you’re now talking about half a billion or so within one to two years. It’s dramatically going to increase our footprint. So relative to our traditional competitors, we are going to super-scale what they do in terms of reaching consumers.

GamesBeat: So the 99-dollar deal is getting good results?

Mehdi: Yes, it’s gotten really great results. It’s early. It’s a test, it’s early, I don’t want to over-promise it. But it’s gone so well that we announced that we’re going to expand trials to broad US retailers. And that has been… The uptake on purchases has gone up pretty dramatically. And then the other thing has been, the feedback from consumers is, they feel like this is a new price point. And I wasn’t sure that would land. It works for cell phones, I didn’t know if it would work for consoles. But the feedback from consumers has been, yeah, this looks like a new price point, 99 dollars does feel like an attractive value proposition, even though when you add up the dollars, it’s still a similar overall layout. Just like when cell phones… People don’t say my cell phone cost me a hundred dollars. They say it cost me 199 or 149 and then I had to sign up for two years, because they were fine with that.

GamesBeat: Sony had that interesting approach, with giving lots of games away for the PlayStation Plus service, a dozen games or so now. It seemed like they’re proliferating… Would you have any observation about that?

Mehdi: Well, I think it’s natural, because we’re moving increasingly to more of a digital world, and as more of these boxes, in particular the Xbox, are high-speed connected, then the ability to get more content and have that relationship with the customer and create more value and charge for that value becomes a real value proposition. What you’re seeing is a natural evolution. We finally achieved a position now where people can go and create those value props. So I think that’s good. We’ll see how they work. We’ll get the data. Consumer interest, I’m not quite sure. I know that with Xbox Live Gold, where we tend to put all of our value, that has continued to do particularly well, and people do like that, so I think it supports the overall statement.

GamesBeat: How do you guys feel about the free-to-play games on the PC? It looks like League of Legends is doing well, people are expecting good things out of Hawken. Crytek’s Warface…

Mehdi: I think those are really interesting. It’s a great space to watch. It’s definitely changing the model of how you can come play games. We love that. We just think that’s great. It brings more people into the gaming world and creates more opportunity.

GamesBeat: Do you think it’s a place Microsoft might dive in?

Mehdi: Possibly. We’re certainly going to consider… We consider all options right now about what will be good for consumers, and so we’re paying attention to it.

GamesBeat: You didn’t talk about next-gen… Is one explanation maybe that we’re not seeing new IPs now because a lot of the new IPs might be directed towards next-gen…?

Mehdi: Ah… You know… I do feel like with the four IPs that we showed, the ones we talked about, LocoCycle, Ascend, I think those are all things that people are probably surprised about. Wow, seven years into the cycle and you’re shipping four new IPs, what’s that say? Well, it says that the 360 continues to be a good platform. The second thing it says… I think we didn’t talk a lot about that, although people have asked… The 360, I very clearly see that we will have the Xbox 360 out on the market for many more years to come. With continued improvements and updates and enhancements. And the reason for that is that it continues to be a very robust platform to do gaming and entertainment. We’re able to continually drop lower prices through things like what we’re doing now with our lower price testing. And we’re seeing volumes grow. One of the things that we talked about, kinda volume cycles, I don’t know if we talked about the generation and what happens with volumes, but… Traditionally, in year four, you see volumes drop. And an amazing thing happened with 360, which has not happened with other services. Year five sales outsold year four. And then year six sales outsold year five. And then year seven sales outsold year six. You’ve never seen that in the history of consoles. And part of that has been that Kinect gave it some new life. And then all this work we’re doing with SmartGlass entertainment apps have given it another round. So I very much see the 360 going, and as a result we’re betting, with our own studios… We showed, on stage, four first-party exclusive premieres of IP. I think that’s a good statement that, yeah, there’s a lot of activity there.

GamesBeat: Are those this year, or are they all next year-ish…?

Mehdi: I think we have some coming this year, yes.

GamesBeat: I think they went by a little fast…

Mehdi: They did go by fast, you’re right. No, you’re right… You’re on the mark. We showed them later in the presentation, and so it was kind of easier… And we only showed teasers on a few of them.