Quotes of the Day

Bill Gates' time is valuable. There are Microsoft employees who wait their whole career to be alone with Gates for 45 minutes. As the richest man in the world and, arguably, the greatest philanthropist in history, at any given moment Gates could and probably should be off feeding the hungry or curing some horrible disease.

But he isn't. Instead he's sitting in a suite at the Las Vegas Hilton wearing a sweater vest and talking about video games and laughing his head off. Gates is here for a trade show and to talk up Microsoft's new video-game console, the Xbox 360. In person Gates is not at all the stiff, unsmiling mandroid people make him out to be, or at least he isn't at this exact moment. He's loose and happy, cracking jokes and making fun of himself and talking smack about his competitors. True, his hair is weird, and his voice sounds as if still changing even though he's 49. But he seems different.

Funkier. "I feel sort of unleashed," is how he puts it. Somehow humanity's most famous nerd has become kind of cool.

It's a decent metaphor for what Microsoft is trying to do in making the Xbox 360. Microsoft, known more for its bullying business tactics than its technological innovation, is trying to act in a very un-Microsoft fashion. It's trying to be quick and nimble, radically innovative, and play well with others. It's trying to reinvent itself from the corporate DNA on up.

But this isn't just a story about Microsoft. It's also a story about a sea change in American culture, which has embraced video games, formerly a despised hobby, as a vital force in pop culture. Gates and his team have spent the past 3-1/2 years working in obsessive secrecy to build the greatest piece of game-playing hardware the world has yet seen. And they don't want to sell it just to a niche audience: they're gunning for all of us.

Even more than that, this is a story about a stealthy technological revolution that has taken place over the past five years, with very little fanfare, and is turning the U.S. living room into a digital, wireless, networked nerve center. You may think the Xbox 360 is a game machine—a toy—but if it does what it's supposed to, it will change the way you consume music, movies, photographs and TV. It might even transform your social life.

Bill Gates would really like a piece of your nerve center. He's bet billions of dollars that the Xbox will get it for him, and hasn't seen one thin dime of profit yet. True, since it launched in November 2001, the Xbox has sold 20 million units, earning it a comfortable, if distant, second place to Sony's PlayStation 2 in the North American market. But the game-console business is a peculiar one: you have to spend a bundle on promotions, and you lose cash on every box you sell, hoping to make it all back by taking a cut of game sales.

That hasn't happened yet for Microsoft. "At some point you have to decide, O.K., when do you stop investing to be credible in the marketplace and start investing to make money?" says Robbie Bach, Microsoft's chief Xbox officer. "A billion dollars of losses each year based on the hardware is tough to sustain."

It certainly is. But insane as it sounds, that is all according to the master plan. The whole point of doing the first Xbox was to have a shot at making money next time around. "The first generation, it's just like a video game," Gates says. "If you play perfectly, at the end it says, 'You get to play again.' That's all it says!" He's cracking himself up. He has a surprisingly infectious laugh. "You put your hand in the till. There's no quarter down there. There's no, like, even tickets to buy funny dolls or anything. It's just, Hey, play again."

If all goes well, the Xbox 360 will be out around Thanksgiving; Sony and Nintendo are expected to follow with consoles of their own in 2006. TIME got exclusive behind-the-scenes access to the minds and the strategy that built the new Xbox. Welcome to the future of fun.

LICENSED TO CHILL
Xbox headquarters is a surprisingly unimpressive place, a generic office park in Redmond, Wash., across the road from a large gravel pit. Microsoft's inspiring name for this low-rent nerd farm is the Millennium campus, and it's where the company's money-losing projects live. Not for them the manicured lawns and sculpted berms and softball fields and fancy cafeterias of Microsoft's main campus. They get the gravel pit.

But, in a way, the isolation of the Millennium campus has worked in the Xbox team's favor. The Xbox project is run by five guys, all Microsoft vice presidents, and one thing they realized early on is that while Microsoft was the right place to get the next Xbox built financially, it was totally wrong for it culturally. Microsoft moves slowly and doesn't make sharp turns. It also doesn't play especially well with partners—like the people who write games and make consumer electronics—has little experience building hardware and has never shown much aptitude for nurturing fun, cool brands. So they set up a kind of separate minicompany within Microsoft, insulated from the institutional lameness of its parent. "They allowed us to set up a separate division almost, that is physically, geographically, psychologically and spiritually different from what Bill himself calls the Borg," says Peter Moore, the V.P. in charge of marketing the new Xbox. Moore knew that whatever has made Microsoft successful thus far wouldn't help it here. And Gates seems to recognize that too. "[The games industry] expects us to act like Microsoft: very formulaic, very product oriented, very march-down-the-straight-path," Moore says. "Bill is very important to us, but he's not driving this thing. God bless him, I think he wants to be more a part of it than we actually, you know, feel comfortable with."

So who is driving this thing? More than anybody else it's a manic, shaven-headed character named J Allard. (Yes, it's just the one letter.) In 1993, as a 25-year-old wunderkind Microsoftie, Allard wrote an 11-page memo that almost single-handedly persuaded Gates that maybe personal computers should be able to connect to something known as the Internet. Now a 36-year- old V.P., Allard is one of the few people who can get the Microsoft juggernaut to change direction; he's known as one of the "Baby Bills," the company's young up-and-comers, and Gates often talks about how much the two of them have in common. Allard is what technology people call an evangelist: a charismatic guy who's so hysterically excited about a product, he gets other people excited by the sheer force of his psychic mojo.

One of the first problems Allard had to solve was what the new Xbox would look like. It's not a trivial question. The old Xbox is large and forbidding, a matte black and poisonous green plastic crate the size of a VCR. Perfect for hard-core gamers, maybe, but if Microsoft wanted to grow its audience, Allard knew the new Xbox had to look kinder and gentler. The goal was a design that was welcoming but not wimpy, that snagged the soccer moms and NASCAR dads and Britney girls—without losing the Halo boys.

Allard's solution was a good example of un-Microsoft thinking. "Guess how you get great design?" he asks. "You don't try to do it with computer scientists from M.I.T. You don't try to do it the conventional way one would think about from a Microsoft point of view." Instead, Allard hired a sculptor from the Rhode Island School of Design and gave him a long leash. The sculptor turned around and hired a dozen extremely expensive boutique design firms to each come up with a design for the new Xbox. He then picked two winners, one from San Francisco and one from Osaka, Japan, and made them work together to build something cool yet approachable--"inviting" was the key concept. To make sure everything was absolutely as pretty as it could possibly be, he also hired a company that specializes entirely in color schemes. "Serious color meetings went down," Allard informs me.

The end result? A modest little pedestal just over 1 ft. high and 3 in. wide, with a gently convex front and slightly in-curving sides.

It's sleeker and slimmer than the old Xbox. (One of the reasons the first one tanked in Japan is that Japanese consumers, having smaller apartments, are very space conscious.) It's also a little feminine—there's a hint of an hourglass figure. There are very few cables because the controllers are wireless. It has chrome accents, but it's mostly a creamy, calming off-white that the color geniuses call chill. And if you don't like chill, it has a snap-off faceplate, so you can customize it.

If the old Xbox looked like something recovered from a fallen asteroid—an angry, evil asteroid—this looked like something created on planet Earth, albeit a near future, slightly utopian planet Earth.

It definitely wasn't from planet Microsoft. "We knew we had finalized it when the research came back from Japan," Moore says. "We asked people, Who do you think designed this? And they said, 'This has to be from either Sony or Apple.' That was the seminal moment."

THE TOLSTOY MACHINE
The xbox 360 does, of course, have a function beyond looking pretty. Its first order of business—but only its first—is to play video games. It's not high praise to say the Xbox 360 is the greatest piece of gaming hardware ever created, because gaming hardware gets better all the time. But there is a wow factor to the Xbox 360 because it's the first console for which all the games will be in high definition, wide screen, with Dolby 5.1 surround sound. It's like putting on a pair of glasses: everything is clearer and sharper and more vivid.

Take the old Xbox's flagship golf game, Tiger Woods PGA Tour 2005.

Put it side by side with the 2006 version, currently a work in progress. The grass in the old version looks like a green carpet; in the new version, each blade of grass is animated individually and sways to its own rhythm. In the old version, trees make crude, round, blobby shadows; in the new version, each individual leaf has its corresponding individually rendered leaf shadow. The play of light on the water hazards is not readily distinguishable from a filmed image.

The fidelity is disconcerting: it gives you a vertiginous feeling, as if you were going to fall into the screen and come out in Narnia.

And fidelity is important. One reason games aren't taken seriously as art is that they don't look like art. They look like cartoons, and not fancy Pixar cartoons either. They look like lame Saturday-morning cartoons. That's going to change. Characters in the Xbox 360 game based on The Godfather have a gravitas and dramatic weight to them that we haven't seen before. Those blocky, too smooth cartoon faces are starting to fill in with wrinkles and lines and freckles.

Suddenly, they emote.

But that's just the beginning. Some game developers may point out that it's not that hard to make a pretty-looking game when you have enough megahertz and gigabytes to throw at it. The real trick is expanding what is called game play: the ineffable, alchemical mixture of pace and structure and balance and story that make a game work.

Consider a military fighting game like Call of Duty: Finest Hour, in which players take part in the major battles of World War II. In the old version, you're constantly bumping into invisible barriers that force you from place to place down preset trails, accomplishing a predetermined chain of tasks. Don't look too closely at the extras: they're not particularly detailed, or all that smart.

In the Xbox 360 version, Call of Duty 2, the game play is a startling leap forward. You can run around at random like the battle-panicked infantryman you are, surrounded by hundreds of your fully realized, equally panicked brothers in arms. You can accomplish your goals (or die trying) in whatever order seems expedient: no more invisible barriers. Clouds of dust and smoke float up and block the sun, interfering with the ambient light—war is finally getting its fog.

The chaos is astonishingly visceral: you're Joe Grunt, playing your little part in vast events that are beyond your puny ken. This is war the way Tolstoy described it, or Stendhal, or Stephen Crane, seen from the bottom up. Suddenly video games have added a couple more octaves to their emotional register.

Of course, war gamers aren't what really occupies Gates. He has them already. (Note to the hard-core faithful: the next version of Halo will not, repeat not, be ready in time for the launch of Xbox 360. It will be part of the all-important second wave next spring. "It's perfect," Gates says, radiant with bloodlust. "The day Sony launches [the new PlayStation], and they walk right into Halo 3." Microsoft is expected to announce that Xbox 360 will play Halo 2 and other Xbox games.) But there's still a significant demographic that for some reason doesn't consider wiggling a joystick to pretend they're shooting somebody a major priority in their lives. To woo this wider group, video games will have to get easier, more approachable, and they will have to expand into genres that don't yet exist.

Most video games are action movies. Where are the romantic comedies?

And the dramatic weepies? "We're not gonna get so everybody in the family loves this thing just with sports and shooters and racers," Gates admits. "We're gonna have to fund, both internally and externally, some high-risk genres and see if those can stick. We can't just stay with the tried and true."

But maybe the new Xbox doesn't need fancy-dancy games or new, risky genres. Maybe it doesn't need games at all.

THE CONQUEST OF THE LIVING ROOM
There's a top-secret 147-page internal document at Microsoft called "The Book of Xenon." Xenon is Microsoft's private code name for the Xbox 360, and "The Book of Xenon" spells out the company's entire strategy for it. Large chunks of "The Book of Xenon" deal with something it calls the D.E.L., which stands for the Digital Entertainment Lifestyle. This is shorthand for the notion that all media—movies, music, games, cameras, phones, TV—are becoming digital media, and that's changing how we relate to them and how they relate to one another. They're merging into a single integrated, portable, customizable media gestalt. This is what used to be known, in the quaint parlance of the now distant 1990s, as convergence.

Which is why, in addition to games, the Xbox 360 plays CDs. You can also use it to rip songs off CDs and play them from the hard drive.

You can plug your iPod into the Xbox 360 and play songs off that too.

You can watch DVDs on it. If you have a digital camera, you can plug it into the Xbox 360 and pop the images up on your TV, which beats making everybody crowd around the computer monitor in your study. If you have sufficient techno-gumption, you can even connect the Xbox 360 to your PC wirelessly, via wi-fi, and access whatever music and pictures you have stored there.

That's not all. The Xbox 360 has ambitions as a communications device. Unlike either Sony or Nintendo, Microsoft has a fully fledged online service, called Xbox Live, to go with its game console, and with the launch of the new Xbox, Gates & Co. is hoping to turn it into a major online community with Friendster-like features that match up compatible gamers. Companies will use Live to distribute game trailers and sell mini-games and new game levels. It will be a free-for-all bazaar. Players will be able to customize games—say, the way the skateboards might look in Tony Hawk's American Wasteland—and then sell their custom wares to one another online.

Right now you can use Xbox Live to talk to people you're playing with via voice chat—think free long distance over the Internet. Soon you will also be able to send e-mail and instant messages. If you have a camera peripheral, you will be able to send short video messages and even videoconference. And here's an important point: with Xbox 360, you don't even have to be playing a game. You will be able to chat with other people over Xbox Live when you're just plain watching TV.

The words appear over the show, or you can chat aloud using a headset. That is, arguably, much more useful than actually playing games. Gates is so stoked about it, he can't believe other companies haven't done it before him. "If there's anything we're confused about, about what Sony's thinking, it's when do they get their act together on the equivalent of Live?" THE NEW ECOSYSTEM
Let's not miss what's happening here. Microsoft, a company known primarily for making highly profitable business software, has put a box in your living room. It entered your house under the humble pretense of being a game machine, a toy for the kids, but it just ate your CD player and your DVD player, and it's looking hungrily at your telephone. It's all up in your media cabinet. It's talking to your iPod, your digital camera, your TV, your stereo, your PC, your credit card and the Internet. It has created a miniature electronic ecosystem inside your home, with itself at the center.

Games are just the condiment. This is the main course, and it's what Gates is really after. Games just get you in the door. "You can't just sell it as a convergence device," Gates says. "You gotta get in there because certain members of the family [I.e., teenage boys] think it's a must-have type thing. But the way to cement it is as a family experience. And the way that it really makes sense for Microsoft, and we justify this sort of circuitous route that we went down, is because of how it fits in the living room."

Gates is anxious that the extent of his ambitions not be overstated: "Think of it as not taking over the digital ecosystem but being a prime player in that digital ecosystem." Duly noted. But the question remains: Is Microsoft about to do in the living room with the Xbox 360 what it did in the office with Windows? Will it create a technology so well positioned and well marketed and so devilishly useful that it becomes the de facto standard and creates an insanely profitable quasi-monopoly around itself? As music and movies become more and more digital, the entertainment business is transforming into a software business, and somebody has to build the master platform on which all that software runs, and the hardware through which it flows. Turn to page 13 in your "Book of Xenon," please: "As the world's software leader, Microsoft is among the best suited to enable and capitalize this transformation. This is our opportunity to lose."

GAME ON
They could very well lose it. Rumors surrounding the PlayStation 3's processor make it sound like the Ark of the Covenant wrought in silicon, and it may be much further along than Gates gives it credit for. "We look at delivering a quantum leap in technology, not just Xbox version 1.5," a Sony spokeswoman said recently. ("Kutaragi's good at rhetoric," Gates says of Sony PlayStation czar Ken Kutaragi.)

For all the Xbox's underdog pluck, the PlayStation 2 still has an overwhelming hold on the $25 billion global video-game market: 68% at last count, to Microsoft's 17%; Nintendo has 15%, according to DFC Intelligence, a market-research firm.

Microsoft doesn't come to the table with a handheld device like Sony's PSP or the Nintendo DS. It doesn't have the in-house multimedia expertise Sony has, or Nintendo's big-time kids' franchises like Mario and Pokemon. All three companies will be showing off their demos at this week's Electronic Entertainment Expo.

Even beyond the world of video games, Microsoft is looking a tiny bit peaked. You wouldn't want to say that it's vulnerable, but last quarter Microsoft missed its earnings estimates by a whisker.

Open-source gadflies like Linux and Firefox are chipping away at its market share in small but irritating ways. Google is making scary noises and hiring away its talent. Apple is winning rave reviews for its new operating system Tiger, which incorporates features that Microsoft was planning for the next version of Windows—which won't be out till 2006. Microsoft isn't going out of business anytime soon, but if it were going to hit a home run, now would be a really great time to do it.

Give Gates credit. He and his company have correctly identified the fastest-growing segment of the entertainment industry in the world and hitched one of their many wagons to it. He's still willing to put down big bets when there's big action. And in this case Microsoft has managed to bind together cultural and technological trends in the same densely engineered overdetermined artifact. We tend to write off the past five years, the post-dotcom years, as a period of relative technological stagnation, especially when compared with the furious frenzy of Internet innovation that preceded it. But since 2000 we've experienced a massive, largely uncelebrated transformation. We've seen the rise of digital music. Digital cameras have become ubiquitous. HDTV is finally coming into its own. Broadband Internet access has become common, as has wi-fi—a coffee shop without a hot spot now feels positively Victorian. If 1995-2000 was the dotcom era, the dot-home era is now upon us. One way or the other, the Xbox 360 gets Microsoft a piece of all this.

The trick going forward is for Microsoft to walk a delicate line between two opposing principles: openness and, for lack of a better word, closedness. Whoever is king of the living room will control the flow of 1s and 0s that very soon will make up the entire fabric of our living culture. That's a big responsibility, and a big test for any company—it's always tempting to use that kind of power to squeeze out the competition. If Xbox 360 were to take over your media cabinet, would it play DVDs with Sony Pictures movies on them? Of course. But would it play songs from a Sony-owned online music store?

Would it accept messages from AOL Instant Messenger? Would it network with a computer running Mac OSX and not Windows? If a platform is too open, you can't make money off it. Too closed, and nobody else uses it, and it withers away and dies.

The final step in the process has nothing to do with what's inside the Xbox: Microsoft will have to make it cool. In addition to giving it that iPod-esque design, Peter Moore will run a very hip, very un-Microsoft ad campaign featuring quirky hipsters wearing the Xbox logo. Moore just threw the Xbox 360 the equivalent of a movie premiere: a party, broadcast on MTV, with Elijah Wood as host and featuring beyond-trendy rockers the Killers. For the Xbox 360's theme song, Moore licensed an obscure Sex Pistols B-side titled C'mon Everybody, with Sid Vicious on vocals. "Bill and Steve, Gates and Ballmer—when we make marketing presentations, they'll sit and watch and say, 'I have no idea what's going on,'" Moore says. "But at the same time, that's what I need to hear. Because if they do understand it, that's when you know you're in trouble."

If it seems incredible to you that, a year from now, there could an Xbox 360 in your living room—or a PlayStation3 or a Nintendo whatever-they're-calling-it—and that you could be using it to videoconference with your brand-new gamer buddies while grooving on a Mahler symphony, think of all those iPod owners who, five years ago, didn't know what an MP3 was. Jaded as we are, the future can still surprise us. It might just be both nerdier—and cooler—than anybody expected.

• Lev Grossman