Tonight, Microsoft took the wraps off its next-generation console, the Xbox 360, via a pretaped special on MTV. But behind the fanfare and youth-oriented marketing were years of development. It was a long process based on lessons learned from the launch of the first Xbox and a lot of introspection at Microsoft's highest levels.

　　THE BEGINNING

　　"The best place to start is to look back at Xbox 1," said corporate vice president and chief XNA architect J Allard when GameSpot visited the Microsoft Campus several weeks ago. "We had a really good vision for where we wanted to go in 20 years. We really saw the vision in terms of the entertainment industry becoming a software industry and Microsoft having the lead role in providing a platform to really motivate the entertainment industry forward in an interactive medium."

　　In mid-November 2001, Microsoft took the first step in exploiting that medium by launching the first Xbox. At the time, the public was skeptical of the bulky black console's chances. "We never shipped a console before," reminisced chief Xbox officer Robbie Bach. "We had never done a console game before. We had never worked with retailers the way we work with them now. We had never worked with our party publishers. Other than that, we knew exactly how to do everything."

　　Three and a half years passed...and Microsoft shipped 20 million consoles, according to Bach. However, the software giant still reportedly loses money on every console sold, and it had to slash its price on the console repeatedly to compete with Sony's even more ubiquitous PlayStation 2. "We knew we were entering the market late, but we wanted to get in on this generation, this last generation, to get our feet wet," said Allard. "We knew the software component. We know how to build the developer platform. We, we had some good hardware experience, and we had great online experience as well. We knew that we had something to bring to the console space, but we didn't know the basics of the console yet. [But] we didn't have a name. We didn't have a broad entertainment brand for Microsoft yet."

　　However, the Xbox team remained unfazed. "It took us 19 months and a day from the day we approved the project to the day we shipped it, which is, you know, about half the time it took Sony to do PlayStation 2," said Allard. "We built a new operating system from scratch, pretty much. We lifted some of the best parts of Windows. From a developer point of view, it was straightforward Direct X, but we didn't have a foundation there, either. So, we kind of built that. "

　　Indeed, Allard admits there were mistakes made with the first Xbox. "We didn't get the controller right," he said. "The Live experience wasn't that seamless in the dashboard. We didn't future-proof it enough. If there's one frustration that I look back on in terms of that, you know, really rapid-fire entry into the market, I would say we had a lot of seams that showed."

　　Bach echoed the sentiment, saying, "We've had our ups and downs. [We've] had some things that have gone well, [and] some titles that haven't gone well. Japan, you'd say, was a down. North America was an up. Europe was pretty steady."

　　THE VISION THING

　　Given the first Xbox's bumpy ride to success, the powers-that-be in Redmond wanted smoother sailing the second time around. And that journey--the journey that will culminate in the launch of the Xbox 360 later this year--began not long after its predecessor launched in 2001. "We started the Xenon program now about three years ago," said Allard, using the code name for the 360. "We said, 'You know what? We want to create a much more seamless experience for the gamer and a much more seamless business for us.'"

　　Waxing metaphorical, Allard described the whole thought process behind the 360."If you think of Xbox 1 as a painting, we mostly sketched in what we wanted to do. So, in Xenon, what I wanted to do was really set out more like a sculptor would and just marinate in the problem for a little bit...decide what it is, what singular vision we wanted to have to shape."

　　However, creating this "singular vision" was no simple task. By Allard's estimate, more than 20,000 personnel are devoting their efforts to the 360 full-time--and not just at Microsoft. "There are close to 4,000 dev kits that are out there. You have all the agencies that are doing the branding work and your advertising work. You have manufacturing partners. You got ATI and IBM. All the suppliers for all the components go in there."

　　So Microsoft decided to define its vision. Said Allard, "We created this integrated approach where the marketing team and the sales teams from all the different regions, the content developers, both third- and first-party, participated in this. We went out. We talked to all the best silicon designers in the world, and we looked at all their road maps. And we made this all converge into a singular vision."

　　The result was the mother of all manuals. "We created what we call the 'Book of Xenon,' which is a 200-plus-page tome that really articulates everything that we're doing. So, if you're in advertising and you want to understand all the functions of the product, you can do that. If you're on the product development team and you have to understand what the trade-offs are between the hardcore user and the digital entertainment enthusiast, you can understand what that balance is."

　　"LIVING ENTERTAINMENT"

　　Microsoft also distilled its philosophy down to a simple mission statement. "With Xenon, we're setting out to build 'A living entertainment experience powered by human energy,'" Allard said. "That's our one-liner. It doesn't seem like it, but it says a lot of fundamental things for us."

　　That philosophy carries through in the Xbox 360, which will have an array of online functionality out of the box, such as voice chat, and even more with the Xbox Live gold service, which will have video chat with an add-on camera peripheral. "In the 3D era, I'd say content was at the center," Allard said. "In this generation, it's all about putting the gamer at the center. You do that and you can get the tipping point. If you can hit the tipping point, we can get 2 billion people that enjoy our medium."

　　Indeed, Microsoft has big plans for the next generation of Xbox Live. One is the exchange of user-created in-game items in the Xbox Live Marketplace, Microsoft's "one-stop shop for consumers to download new game trailers, demos, episodic content, levels, maps, weapons, vehicles, skins and other types of new content on demand."

　　While it was known that gamers could buy developer-created content via Xbox Live Marketplace, Allard commented that it would eventually expand to an eBay-like model of gamer-to-gamer commerce. He outlined one potential scenario: "Kirsten," a gamer's graphic-designer girlfriend, makes his character in a Tony Hawk game a "cool" T-shirt. He goes on Xbox Live, and his friends see him wearing it in his gamer profile--an online ID card of sorts that will feature photos of the gamer--and they all want one. Then the group all wears them online, and then thousands of people want one of Kirsten's shirts for their THUG character.

　　"Now Kirsten opens a store online. She's making a dime, or whatever, per shirt, and now she's got a reputation online. She's got her 'gamertag.' She's got a gamer card. She's got a reputation," said Allard, implying that the Xbox Live Marketplace will support transactions between gamers. "You know, if that happens enough, then you've got Mark Ecko or Tommy Hilfiger saying, 'I want to be part of that.'"

　　However, it won't happen overnight. "So, we're actually going to partition that user-created content in a way so you can only see user-created content by your friends as the default. The scenario that I'm describing is probably several years out there."

　　Another new human-powered feature of Xbox Live will be online tournaments--tournaments thousands could enter and millions could watch in a spectator mode. "Football, soccer, Halo, you name it... Anything that can culminate in peer-to-peer, head-to-head competition can be built into a tournament mode," Microsoft corporate vice president of worldwide marketing and publishing Peter Moore told GameSpot. "I think then, we, as an industry, get into the broadcast business because hundreds of thousands of people will log in and watch."

　　Not only does Microsoft plan on hosting these tournaments, but it also plans on profiting from them as well. "Companies like a Pepsi or a Nike would be delighted to get our consumer, who they are having a great deal of difficulty getting to right now," Moore chimed. "People will watch. People will pay to enter, particularly if there is serious prize money at the end of it." Moore speculated that he foresaw tournament champions taking home million-dollar purses. That and the bragging rights that come with being the World Halo 2 Champion.

　　THE CONSOLE

　　But for all the grand thinking outside the box, one big issue remained: the box itself. First off, the thing needed a name. "If we were building another console in the 3D era, we'd just call it Xbox 2," said Allard. "So, we eliminated Xbox 2 from the list. So, the name that we came up with was Xbox 360, because we are putting the gamer at the center of the experience."

　　With the name out of the way, Microsoft then wrestled with the look of the Xbox 360. One of the biggest criticisms leveled at the original Xbox was that it was, for lack of a better term, ugly. "We really wanted to get the industrial design right this generation," said Allard. "So, we went out, and we hired a sculptor. We hired this guy, Jonathan Hayes [now manager of platform experience design for Xbox], who's a sculptor by nature, and we said, 'Let's go create a design.'"

　　Hayes oversaw the design of the 360 with the input of two external design firms--one in Osaka, Japan, and the other in San Francisco, California. Reportedly, five functioning prototype consoles were made, including one with a GameCube-like handle that could stand on its side like a PlayStation 2. But while the handle is gone in the final model, the sideways-standee option remained.

　　The Xbox 360 got a new paint job as well. "We actually did a ton of color research, and the white signals the direction that consumer products are going," Chris Satchell, the general manager of XNA at Microsoft, told GameSpot. The color was also chosen with the console's customizable faceplates in mind. "It gives you a nice foundation and a nice neutral palate to work from," said Satchell. It was also designed with an eye to the future. "In 2007, you're going to have a lot more silvers, a lot more glass, a lot more transparency, and a lot less black. That's just the direction that things are going."

　　THE FUTURE

　　While clearly aiming for the future, Microsoft is also not forgetting about the past. "We've got a great lineup of games in 2005 and 2006 for Xbox," said Bach, countering claims that Microsoft was planning to soon cease production of its current-generation console altogether. "We got 20 to 25 million customers who are going to want games. They're not going to stop playing games because we started to ship a new generation of product."

　　But Bach wasn't shy about predicting that the Xbox 360 will be a success. "It is the entertainment product of the decade, and [it] will turn what I think is the 'thought leadership' we currently have right now into 'market leadership,'" he said. Bach also now sees the "HD Era," as Microsoft calls the next-generation of consoles, as a two-way race. "Nintendo is good and cute...and there's nothing wrong with that," he said. "That's really good, but it's a piece of the market. It's a piece of the market, and so, we look at it and say, 'They'll be a competitor, but in a different category almost.' I don't think they have the same ambition that either Sony or Microsoft does in the more mainstream interactive entertainment space."

　　How long will the next-generation console war rage? About as long as the current one did, according to Allard. "We're designing a product in 2004 that ships in 2005, that comes of age in 2007 and 2008, and is on your shelf for five years," he said. "The average life span is probably five years for the consumer." And if Allard's prediction is true, then gamers can probably expect the Xbox 720 sometime in 2010.

　　[ For a thorough rundown on Microsoft's new console, check out GameSpot's special Xbox 360: Inside and Out feature. ]