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.

Meaning no offense to my friends at G4, I was pleasantly surprised at the caliber of power execs who came to their "Best of CES" showcase and party last night (that's "Attack of the Show's" Kevin Pereira" hosting on the right). If CES had a Hollywood party, this was it.  Amongst those I saw at the event:

-"Pirates of the Caribbean" and "CSI" producer Jerry Bruckheimer

-Google CEO Eric Schmidt

-Comcast CEO Brian Roberts (OK maybe he's not a surprise, since Comcast owns G4)

And apparently there were even more who I didn't see. Speaking to G4 president Neil Tiles near the end of the party, he told me Lionsgate CEO Jon Feltheimer and MGM CEO Harry Sloan stopped by as well.

Seems like G4 has got the connections and or the sway to get all the big names from the entertainment biz who wanted to see the hottest gadgets at CES -- and see each other and be seen, perhaps -- to come by its shindig.

Say hello to “Kodu.” It might look familiar. Kinda like Sackboy’s little brother.

At tonight’s pre-CES keynote, Microsoft unveiled a new "game creator" (their term) that will look pretty familiar to anyone who follows the videogame world, or pays attention to  Sony ads.

“Kodu” is, as Microsoft entertainment president Robbie Bach describes it, a way to "empower everyone, the entire breadth of our audience, to create their own games."

What does it look like? Well, it’s an accessible, adorable application that lets regular people design and share their own own videogame levels. Microsoft can protest as much as it wants, but in the big picture, it's about as distinct from “LittleBigPlanet” as avatars are from Miis.

The most obvious difference, however, is that "Kodu" is 3-D. It's not just a platformer. In the demo that Bach did with a 12 year-old girl named Sparrow, the game she created in her little 3-D world was essentially fetch, in which two robots tried to get objects spit out of a machine and return them to a spot for points.

Watching Sparrow create the game, it's largely based on equations (like the ones on the right). Telling the factory that every 10  seconds it spits out a new item, for instance. When I say "equation," I mean you're literaly using + and = signs to make in-game rules.

The menus are still tricky (just like in "LittleBigPlanet," you have to navigate through a lot of stuff), but it's a language that anyone who graduated elementary school can probably understand.

Unlike "LittleBigPlanet," "Kodu" isn't the result of years of work by a development studio. It came out of Microsoft R&D, where it started as a way to help teach kids how to program. Because it's not a "game," per se, it won't come with a rich campaign or, I'm going to guess, arch voiceovers by Stephen Fry.

It's coming in the spring and it'll be downloadable. Microsoft hopes to use it to fuel lots of user creations on its Community Games channel, though it's not clear if there will be a rich social community a la "LittleBigPlanet" (rating, tagging, etc.) or if users will just be sharing the games they create with friends.

"Kodu" is definitely not a "LittleBigPlanet" killer. Sony's game is inarguably the richer experience. But Sony will no longer be able to claim it has the only console with an accessible and intuitive level builder. And based on what I say, "Kodu" may even offer a few tricks that make videogame building even simpler than "LittleBigPlanet" has shown us it can be.

Speaking at a pre-CES videogame panel Wednesday afternoon, Alex Rigopulos, CEO of "Rock Band" developer Harmonix (owned by MTV), reportedly said his studio isn't focusing on making a third annual version of its key franchise this year (details here or here). Instead, all its energy is going into the "Beatles" focused-spin off game (details on that are here).

As Rigopulos said, that's no surprise for creative reasons, since making that Beatles game good is really important. But it also makes sense business-wise. MTV paid a LOT of money to get rights to the Beatles and needs it that game to sell better than any of the "Rock Bands" have. perhaps more importantly, "Rock Band 2" has sold significantly worse than the original "Rock Band" since launching. It would be hard to justify a third iteration, especially under the assumption that the economy will still be weak next fall. In fact, "Rock Band" for Wii (that's the original one, not "Rock Band 2") was the only version of the game to break NPD's top 20 in November. So there's no reason to think that interested buyers won't be perfectly fine with "Rock Band 2" this fall.

I'm departing momentarily for Las Vegas and the Consumer Electronic Shows, where there will be lots of tech news, but only a limited amount of stuff about videogames. Those of you interested in everything tech, especially as it impacts the entertainment biz, should keep up with Variety.com's CES blog (just launched, still a few kinks right now), where Scott Kirsner and I will be updating on the hottest news and trends.

For my loyal Cut Scene readers, though, here's the videogame-related stuff that will be on display at CES:

-Microsoft, as always, will have a big presence and give the keynote address. I expect they'll be touting the latest stats that over 28 million Xbox 360s have been sold, giving it a comfortable lead over Playstation 3 (never mind that pesky Wii), touting the success of Netflix streaming on the box, showing more content from "Halo Wars" and "Halo 3: ODST" and maybe a few new things. In addition to covering the keynote and checking out the products, I'll be talking one-on-one with Microsoft's entertainment and devices president Robbie Bach, who usually has good insights on his own company and the market.

-Capcom will be in town showing off "Street Fighter IV" and "Resident Evil 5," complete with a "SF IV" match-up between players picked by Microsoft and Sony (details here). If I get any hands-on time, hopefully I won't be quite as humiliated at "Street Fighter IV" as I was at E3.

-Sony Computer Entertainment. Though the Playstation 3 and PSP -- and their games -- got virtually no mention at the ocmpany's press conference Wednesday afternoon, they're sure to ge ta spot in CEO Howard Stringer's keynote Thursday morning.

-Sony Online Entertainment will be at CES with "DC Universe Online" and "Free Realms."

-Activision Blizzard publishing president Michael Griffith is giving a speech on Friday. Perhaps not coincidentally, the website for Activision game "Prototype" is counting down to tomorrow, indicating he'll be bringing a new trailer or something with him for the game.