Microsoft's Robbie Bach on Xbox and the recession

I spoke to Microsoft entertainment and devices president Robbie Bach at his company's booth at CES to go a little more in depth on his company's entertainment business, particularly videogames, in the face of a recession. He was largely upbeat (shocker!), but opened up a bit about how the slowdown is impacting the mix of what Microsoft sells. In addition, we talked about how his company is doing in its efforts to expand its audience to families (and other people mostly buying Wiis), music videogames, and how online is effecting the Xbox business's bottom line.

How do you see the recession impacting the videogame business? You have growth rates other media sectors would love, but the holidays were certainly down from earlier this year and last year.

I think what’s happening is people are still buying consoles, they are excited about consoles and gaming. They want to be entertained even when the economy is not entertaining.

What we will see and we saw a little in the December period is that when people go into store to buy a console, if last year they were buying five games, maybe this year it’s four. We do see people making value choices. The other thing I think we see happening is AAA content is still selling exceptionally well, but as people buy a little bit fewer games, the stuff they’re not buying quite as much is A titles or portfolio titles from the previous year.

So for Microsoft, are you seeing the $200 arcade version of the Xbox 360 perform proportionately better in the slow economy than it did in the past?

We don’t break those figures down, but we have seen the $199, 179 Euro product do very well. It varies a little by retailer as well. At a place like Wal-Mart, the arcade edition does a little better than some other places. At Gamestop, the arcade does very well, but it’s a different customer mix where more are looking for a hard drive [only included in the $300 pro and $400 elite editions].

Reaching the family audience was a big push for Microsoft this fall, from the redesign of Xbox Live to new games. While the redesign seems to be doing fine, I haven’t seen much sales momentum for “Lips” or “You’re at the Movies.” Do you think you’re succeeding at expanding your audience?

It’s still a little early to tell. We have to go survey. It’s a research project. I will tell you anecdotaly I know the audience is expanding quite nicely. The two areas helping us expand the fastest are music titles, like “Lips,” “Guitar Hero,” and “Rock Band,” and the second area is the Netflix arrangement [Xbox 360 owners can now stream Netflix movies through the console]. A number of people have come up and said, “Wow, Netflix is so cool, that’s how I was able to convince my spouse we need an Xbox and put it in the living room.” That expands the demo to people who aren’t traditional gamers, even if they start to watch movies, they end up playing games.

You mentioned the importance of the music category, but it seems like “Rock Band” and “Guitar Hero” sales are slowing. Do you agree and how is that impacting you?

Music is still very strong. You’re not going to see the same growth this year as last year because of where the business is. But I think category is still very, very strong. It has a visceral appeal. We see it in the download numbers on Xbox live. We’ve had an amazing 60 million songs downloaded.

Between all those music downloads, the games and videos available to download that you’ve said are growing in popularity, and the new advertising opportunities on Xbox Live, is that business becoming meaningful for you compared to consoles and retail games?

Xbox Live is a good business for us and a good business for our partners. If someone says, “Walk me through the contributions to your P&L,” I’d say [in order] consoles, plus or minus, are break even; software, both first party and third party licensing, are very good; peripherals are very good; and finally Xbox Live is a good business.

Can you tell me a little more about “Kodu?” Is it a game or an application?

It starts as a set of tools. It’s a “Hey you can create your own environment!” product. But then once you create the game, now it is a game and you can share that with other people and play on Xbox Live. So this is both things.

But it doesn’t ship with a full campaign story mode? Because the obvious comparison is “LittleBigPlanet.”

I don’t think it’s a lot like “LittleBigPlanet.” It’s a new game every time. It’s a development environment, in which you can download and share.

And “Kodu” would be something that users pay to download on Xbox Live? Would there be a full social network where you rate user created games, tag them, and so on?

It’s a little early to talk about. We’re still developing how that plays out. The [Xbox Live] community channel as a whole has that rich environment where  a lot of feedback. The opportunity to get feedback on variety of different games is a hallmark.

Keep in mind the audience we’re targeting it to initially probably ends up being a very young audience. People who are interested in some fun learning activities. What I’m interested in is whether it catches on with the broader Xbox audience… How far into that audience does it go? Would Ben want to be creating a game?

In the keynote you touched on Zune Social, the online store and environment, but not the devices. Are you trying to separate them more so you can grow Zune Social apart from how the players perform?

It’s not a separation. We continue to work on devices, build devices in that ecosystem. Certainly, we recognize music is a genre that isn’t just isolated to these devices. You have it on PC, Xbox, on mobile phones. We do think Zune Social could play a role in that.

Much more from the Consumer Electronic Show at Variety.com's CES blog.