The Engadget Interview: Bill Gates (again!)

CES wasn't only about crazy gadget news and booth tours – we also scored a second chance to sit down with our new best friend Bill Gates and ask him all about the big announcements he made during his keynote last Wednesday. Read on to find out what he had to say about online video download subscription services, whether or not he was happy with the launch of the Xbox 360, which Xbox 360 games he's been playing, how he still thinks there's time to avoid a format war between Blu-ray and HD-DVD, why he doesn't think that Apple's switch to Intel chips makes a difference for Microsoft, and how he is now, finally, a Treo user.

Thanks, it's good to sit down with you again, I hope you're having a good time at CES.

Oh, it's always fun.

Before we start, I wanted to congratulate you and your wife on being named by Time as their Persons of the Year along with Bono.

Thank you.

First off, I wanted to talk about some of the stuff you talked about your keynote, specifically Vongo, which is going to be the first of what I presume will be several online video subscription services that will be announced in the next few months. It's similar to the ToGo services that are available already for music, but do you think that online video download subscriptions have a greater chance of being successful than the rental model has so far been for music? Are customers already used to the idea of renting movies, but it's taking them some time to getting used to the idea of renting music?

Yeah, I mean, movies are a bit different in the sense that it's often that you'll want to see it once, and then having it in a library wouldn't be that critical to you, whereas with music you're going to want to listen to it many, many times. In fact, you can hear it once on the radio and get that sample, so it's the ongoing use that's the real value there.

Video is clearly behind music. It's not as easy today to get your videos on your disk and manage them that way, that's why there's this Managed Copy thing that we do with the HD-DVD guys to make sure that you can always do that. We're getting more of it on the Internet so it's easy to sign up and use, getting the portable devices so it's quick and easy to download; there's a lot of work that we and others are doing, but that's going to be a mainstream scenario.

So do you think that the rental model for video will be more successful than it will be for music?

Yes, but it won't -- movies will have all the different business models: buy it so you have rights to use it forever, have a subscription service that has a very big library, which is the Vongo approach, so both ala carte, single time usage and broad subscription.

How are the movie studios receiving this new model of downloading movies? Starz has their collection [with Vongo], so they obviously have some studios on board, but across the board what sort of reception are you getting?

Well, of course, in the dialogue with the rights owners, they're very interested in our rights management system, [asking if] there is something that we're doing that is both easy to use and yet makes them have some comfort. And we have that dialogue with the cable industry in terms of being able to connect up, they demanded enough that it will only be with Vista that we'll be able to meet their requirements, and with Vista Media Center that will be a new feature that comes along with that.

And so Media Center will finally have that CableCard support that people have been looking for?

Well, we've been working on getting the cable industry to authorize that for a long time, and so it's only with Vista and a lot of hard work that we're able to meet their needs there.

One of the products you showed off yesterday was the new Toshiba Gigabeat S series, which is, I think, the first new Portable Media Center that has come out from a major manufacturer in a while, almost since the introduction of the Portable Media Center it seems. Are we going to see revitalization of the platform now that we have these subscription services that are going to be available for it?

Well, absolutely it's a case where we definitely pioneered the category, but only by constant innovation, making the downloading easier, getting the libraries to be bigger, really promoting our hardware partners and what they're doing there, can we retain leadership in that scenario, which is very important to us. So it's going to take a fair bit of work. It's more on the interface and content side, but it was amazing to see the device progress. I think we have a good lineup of devices.

PlaysForSure works on a variety of different audio-centric devices, regardless of what sort of operating system, so to speak, they run on, but will there be video subscriptions available for videos that aren't running Portable Media Center? Will there be PlaysForSure for video?

Yeah, PlaysForSure is about the rights management and format, so that you know that anything you buy will work on that system. Separate from that is the idea of having a consistent user interface. So with the Portable Media Center we think it's great to have both, but if somebody wants just PlaysForSure without our user interface, that's fine, too. The simplest thing for the user is to say, okay, I've seen the Media Center menus, I know those, as I take the portable device it's exactly that same structure.

They won't have to be tethered?

No, PlaysForSure is about format rights and format compatibility, whereas our Portable Media Center software is about that consistent user interface.

One other thing you talked about yesterday in the keynote was Urge, which was announced last month. I wanted to get a better sense from you of how Urge fits into the overall portable media strategy. How does this fit into what you're doing with PlaysForSure and the DRM-based subscription services that different companies are offering?

Well, we've always believed in an open platform so that you can have choice of device, choice of where you buy music, what music subscription you go to, and yet you know that those connect up and the user interface is quite reasonable. Doing that, and still making it very simple to use so you have the best of both worlds, the variety, and the simplicity, that's always a challenge as we tackle these new scenarios.

With music, having MTV as a partner is a great thing. We think they can get the word out, do some neat things. We're also doing a lot in Messenger to make it so you can share playlists, so you can listen to different things. The next version of Messenger has music as one of the big breakthrough scenarios.

Will there be any integration between these two things?

Well, the commitment we have from MTV is to take full advantage of the new Media Player technology, both as it ships in Vista and as we have that Media Player available as a download on XP, so they're really the first music service that's actually helped us design those new Media Player capabilities there. One of the things we're showing is that we actually take the music library database of all the things in the subscription list and bring those down onto the PC -- that's why you can get that super quick easy browsing interface even when you're dealing with literally millions of tracks.

It's automatically pulling down all the metadata?

That's right.

The last time we sat down the Xbox 360 hadn't been announced yet --- or at least it hadn't been officially unveiled yet. It's been a couple months now, are you happy with how things have gone so far?

Well, I spent most of my Christmas playing Xbox 360.

Which games?

We played quite a variety. Actually, the Xbox Arcade was a big thing, a lot of the adults wanted to sit down and play for five or ten minutes. It was Hexic or Zuma that were easy for them to learn the rules, get used to the controller. We had some younger kids who were just beating the heck out of me at Project Gotham Racing, Kameo, basketball, Perfect Dark Zero. We have, I think, a dozen titles in total. And the thing that I thought would never happen really did happen to me, where I was standing 12 feet away and I thought, “Oh, they're watching a basketball game,” and then as I walked up I realized, “No, no, they're just playing Xbox 360.” So that was a lot of fun.

The only problem we've got is we've just got to make them faster, we've actually ramped up as fast as anybody ever has, but demand is still way ahead of us.

There were some shortages this holiday season.

The demand was phenomenal, and we did add Celestica as a third manufacturing partner. We think by the time we get to the 4.5 to 5.5 million unit level that the backlog won't be all that substantial. So obviously it's a good news situation, but we want to meet all the demand.

How many do you think you'll sell in the first year?

The only number we've given publicly is that for the end of June it'll be 4.5 million to 5.5 million. Then after June, of course, we'll get into another holiday season and that should be a very big deal because that will be a holiday season with a pretty unbelievable number of titles. We had about 18 at launch, we'll have 50 by the middle of the year, so as we get into the second half of next year we'll go up above 50 there as people learn how to take advantage of the graphics capabilities that much more, bring that much more depth to it. We'll have poker coming out in the first half of the year, a lot of people excited about that; we'll have new peripherals that we've talked about, the camera will come up; as well some of the connections to the PC on the communication side so you can text message between PC and Xbox. We'll get some of those things in place.

So there's a lot of things that will make it an even more attractive product and we'll be able to meet all the demand that's out there. So this will be a big holiday season. We planned Xbox 360 from the beginning as a multi-year cycle, making sure there were no periods of time where there weren't neat new announcements, peripherals, games and those things, and so that's worked well for us. We'll go into a lot of new countries over the next year, we're already in a lot, but we're adding a ton of countries we never went into with the first generation.

There's been some speculation about the Xbox 360 as a platform for IPTV. I know IPTV is something I asked you about back in April, primarily as a platform for set-top boxes and things like that, what do you see as the 360's potential as a means for delivering video to the home?

Well, the Xbox 360 obviously has the ability to do high definition and that's what makes it such a fantastic extender for the Media Center. That's another thing I set up, and just the speed of it, the fidelity of it is really better than the previous generation of extenders that we had.

It's rich enough that, yeah, it can do set-top box like things. If you just want a set-top box, [the Xbox 360] is somewhat overkill, the graphics power that we've got there is for the world's best games. Now that the cost of the chips in Xbox will be coming down over the next three, four, five years, it could get fairly cheap, but I still think you'll see dedicated set-top boxes. You can always think of something like the Xbox 360 as a super set-top box that can do everything the set-top box does, but then have the graphics to do the games as well.

Are you ready for Sony later this year?

Well, we think so. We've got a lot of things that they don't know that we're doing, so we'll keep them on edge a bit. We think that this whole thing has become very software centric; that is, the toolkits that let developers do their best creative work -- that plays to our software strength, as well as the idea of Live, where we had to learn a lot with Xbox 1, and the decision to require broadband, to go with VoIP, but we learned a lot about wanting to put things into the operating system so you can chat even while you're playing the games, it's really a level of richness that the games are built on top of that we didn't have that last time. We learned how to do that, we learned about contests and spectators, and so this is really a second generation of Live for us. It's very based on software expertise, so it will be interesting to see what Sony does in that dimension.

We also now have a situation where if your friend has already bought an Xbox and you go to buy something that you want to play with them, it's not like last time where at his house you play his game and at your house you play your game. Now it's all online, you've got your achievements and things, so it will be a fascinating competition.

How would you define success for the Xbox 360? What sort of percentage of market share do you think you have to have by the end of this year?

Well, you know, we're already successful. I mean, we're the hottest product there was at Christmas this year. I don't think there's any doubt we'll have a substantially higher share in this generation than we had last generation.

And it depends on our execution, it depends on Sony's execution. This is a business we're committed to, so we're just going to keep doing our best. We actually think the size of the market will grow quite a bit because of the idea that we've got music and photo capability, we've got this Arcade thing to appeal to different age groups, and we're going to get a better breadth of games this time, so we think the overall total units between us and our competitor will actually be quite a bit bigger this time around than it was last time, and that's good for all of us.

Are we going to see Halo 3 launch around the time of the launch of the PS3?

No, I have to make sure that any speculation I did about that is -- it's up to the team when they want to ship that, and they're going to take their time to make that a super great product. So even we don't know when that will come out. That's one of many games that are just phenomenal that are in the works, but it's up to the artists to do it when they feel good about it.

You announced yesterday that the Xbox 360 will have an external HD-DVD drive, and so it seems you've firmly committed to

that platform as opposed to Blu-ray, but do you risk fragmenting the Xbox 360 as a platform by introducing an HD DVD drive? Is that going to be an issue for developers if some consumers have a version of the 360 with an HD-DVD drive and others don't?

There's no fragmentation here. The developers are creating games that run on the DVD-9 format that's in every Xbox, and whatever we do with the drive, they'll all be upwards compatible with that. So that's how the games are written and it's a very clear message that lets game developers get huge volumes and payback for the big investments that they make.

In terms of movies, I often say that this is the last format battle there will ever be, because everything is going to go online -- you're going to download it. In fact, one of my favorite features on Xbox Live is where you can go and get the HD demos of the games or get HD videos like the making of the Xbox, the making of Titanic, they've got this Mission Impossible 3 thing. It's really cool when you're set up with an HD display, the fact that you can just click and it either streams or downloads, that's very nice.

The thing about HD-DVD that is attractive to Microsoft is thart it's very pro-consumer in letting you copy all movies up onto the hard disk. We hope that if there's an agreement around any format where things come together, we really believe that it's got to be consumer friendly in that respect, that the way the interactivity is done, the so-called IHD, really supports the kinds of things we think that creative people want to do. So the HD-DVD is a peripheral, that's a nice option for our users.

It seems like you're very firmly behind HD-DVD. Do you want Blu-ray to fail?

I think the best thing would be to have a common standard for the industry that would include great things like Managed Copy. The studios have to be willing to take that risk to let consumers have that flexibility, otherwise I think they're just making a mistake that the next digital format may not get to critical mass at all, no matter which one it is. I also think the interactivity, there should be some alignment around that, but eventually there probably will be some coming together and it's not easy to predict when that will be.

It seems like it's too late for a unification of the platform.

No, I don't think so.

You don't think it's too late?

No, I mean, in consumer electronics there's often been unification. The nice thing is that when you move away from the physical format it's all just software, so you can render Windows Media, H.264, all the different formats are very straightforward. As long as you're in the physical media world you get these standards battles, and here all the needs are not being met in our view by anything but HD DVD.

A few months ago Apple announced that it was switching to Intel for its processors. How does this affect Microsoft?

It doesn't really change anything for us. Apple has always leveraged technologies that the PC industry has driven to critical mass, the bus structures, the graphics cards, the peripherals, the connection networks, things like that, so they're kind of in the PC ecosystem and kind of not. Now they're taking advantage of the Intel chip. The users don't really care what's inside the machine in terms of the processor.

There is a certain irony that we've got a game box that uses the same processor Apple used to use, and now they don't use that. We have compilers that can take Intel code and make PowerPC code or take PowerPC code and make Intel code, we've got emulators. The flexibilities back and forth between the CPU environments is actually pretty high nowadays.

Do you worry that they might decide to make the operating system available to anybody?

No, that's fine. In a sense whenever you buy a new machine you've always had the choice of buying a Mac OS machine versus a Windows OS machine, so it's the same flexibility. We even had on the PowerPC this thing called Virtual PC that lets you get Windows capability over on their hardware.

So you don't worry about Apple opening things up so an OEM like Sony could offer OS X?

Well, the last time Apple went out and licensed their operating system to people they changed their minds and they bankrupted all the people who had been involved in that, and I don't know if we'll see another round of Apple tantalizing people with that or not.

I know we're running out of time, so I'm going to ask one last quick question. Well, I want to ask one quick question about Vista and Photon, which is the new version of Windows Mobile which I got a sneak peak at last month. It seems like usability and aesthetics are finally becoming a bigger part of the interfaces for the different operating systems. Is that something that you think there is a bigger emphasis on now?

Well, you've got so much information in the system -- music, photos, e-mail attachments, files. The ability to navigate that in a rich way, using the better displays we've got, the better graphics chips we've got, but with a very clean user interface environment, that is absolutely necessary. People are doing more with the PC, there're more scenarios where software is adding value, that you want to leverage a few simple techniques ,so when somebody goes from TV to photos to spreadsheets they already feel like, okay, I know how to navigate, I know how to search, and so a lot of work went into the user interface.

Two last questions, ones that I didn't get to ask the last time around, before I run out of time: Which cellphone do you carry now and what's your portable music or media device?

Well, recently I've been using this Treo 700w that I think is a great product, Palm has done a good job on that. We've got quite a variety in cell phones with Windows Mobile, more and more people backing that, but that's one I've been using recently.

And portable media? Or do you just use the phone?

Well, actually I do think the phone is a primary way that that will be done, but in my family we've got, I think there's an iRiver, a Zen, quite a bit of variety of PlaysForSure devices.

You probably own them all by now! Thanks so much, I appreciate your time.

All right, thank you.