Moore's War
By Geoff Keighley

(Business 2.0) – It's not surprising, considering the products they sell, that executives in the videogame business like to pepper their speeches with trash-talking one-liners about rivals. But there are few opportunities for unscripted face-to-face smackdowns, so Peter Moore relishes the moment he bumped into Ken Kutaragi in a corridor at the Tokyo Games Show in September. Moore is the top marketing executive for Microsoft's next-generation console, the Xbox 360; Kutaragi, the legendary Sony PlayStation CEO, is his archnemesis. The two shook hands, and Kutaragi invited Moore to the Sony booth "to check out the PlayStation 3 videos." Videos? Yes. The PlayStation 3 is not due out until April, and all Sony had to demo in Tokyo were noninteractive computer graphics. The Xbox 360, which launches in the United States on Nov. 22, did not have the same problem. "Thank you, Ken," Moore said with a toothy grin. "But come by our booth if you want to play actual videogames."

It might make for a good trade-show zinger, but Microsoft's strategy of moving first in this latest round of console combat is risky. No one knows that better than Moore, who helped launch an acclaimed game system for Sega six years ago--only to see it crushed a year later by the avalanche that was Kutaragi's PlayStation 2, which now commands a 60 percent share of the $25 billion global market.

If any company has the muscle to challenge that dominance, of course, it is Microsoft. Having gained a strong market footing for the first Xbox, at a cost of $4 billion in losses, Bill Gates and Steve Ballmer are doubling down their bets on its successor. And they've tapped Moore to shake up Redmond's staid corporate culture and spearhead a marketing campaign costing at least $50 million--one that aims far beyond the Xbox's audience of game geeks into the elusive realm of "cool." The goal: to outflank Kutaragi by finding a mainstream audience even PlayStation couldn't reach.

The stakes are enormous. If Moore's attack makes significant inroads into PlayStation's market share, he will have almost single-handedly realized Gates's vision of Microsoft as a home entertainment powerhouse. But if Kutaragi has the last laugh, then Microsoft--already scrambling for a looming war with Google over the desktop--may have an even greater rival on its hands. It's no secret that Kutaragi expects the PlayStation to one day replace the PC. "For Peter," says Xbox executive J. Allard, "this time it's personal."

Most Microsoft executives are former Ivy Leaguers or Silicon Valley engineers. Moore, the son of pub owners from Liverpool, England, is a former professional soccer player and PE teacher. In 1981 he and his wife packed up and moved to a trailer park in Long Beach, Calif., where Moore earned $10,000 a year selling soccer shoes door-to-door for French company Patrick. He was a tireless worker, and Patrick's business in California tripled within four years. In 1992, Moore switched to Reebok, where he started the company's soccer business, built the first large-scale factory for soccer ball production, and signed Venus and Serena Williams to their first endorsement deals when they were in their midteens.

Moore's marketing playbook became so legendary that in 1999 the Japanese game publisher Sega hired him to broaden the appeal of its Dreamcast console--a mere seven months before it was due to launch in the United States. When Sega's president found out, he cornered the U.S. CEO and said, "We make videogames. Why do you bring me a shoe guy?" Moore went to work forging partnerships with MTV and the Ozzfest Tour. He made employees watch an attitude video cut to a Marilyn Manson song to keep Sega in touch with the youth market. The Dreamcast failed to gain steam in Japan, but its U.S. launch was spectacular, with 1.8 million units sold in the first four months.

Then in 2000, Kutaragi started hyping what he called the "emotion engine," the breakthrough microprocessor in PlayStation 2. He promised that it would deliver real-time graphics that would rival those of Toy Story, games that would make you cry, and DVD movie playback right out of the box. It worked: The PS2, as it was universally known, became an object of desire, and Dreamcast's momentum ground to a halt. "What Kutaragi did to Sega is legendary," says Andy McNamara, editor-in-chief of Game Informer magazine. It even became a verb in videogame circles: To "Dreamcast" is to use the power of nothing but a dream to crush the competition.

Bleeding money, Sega pulled the plug on Dreamcast in January 2001. From then on, it would be a company that made nothing but games--mostly for the PS2. Moore agreed with the decision but had to fire 52 employees, many of whom he had personally recruited from Reebok. "A part of me still hurts from that experience," he admits.

Moore wasn't the only one smarting from the PS2's success. In the late 1990s, Gates was in talks with Kutaragi to include the Windows operating system in the PS2. But Kutaragi had long seen Gates as the most lethal threat to his empire. Bernie Stolar, a former Sony executive, remembers Kutaragi asking him as early as 1994 where he thought the nascent PlayStation console's main competition would come from. Nintendo, Stolar guessed. Maybe Intel. Kutaragi looked him squarely in the eyes. "No, Bernie, you are wrong," he said. "It is Microsoft. And I will kill them."

Rebuffed, Gates fast-tracked a plan for Microsoft to design and launch its own console system in 18 months--even though the company typically creates software and services, not hardware. "It was a half-baked plan," Allard now admits. "Very much ready, fire, aim." The team emerged with a hulking black box that housed an Intel Pentium 3 chip and an 8-gigabyte hard drive--in effect, a mini PC. When it came out in the United States in 2001, a year after the PS2, the Xbox was technically superior. It had better lighting and sharper colors. It was easier to develop games for and had a killer launch title in Halo. But the system proved no match for PlayStation 2's sheer momentum, helped by games like Grand Theft Auto III--which Microsoft had passed on publishing before its creators took it to Sony.

Moore joined the Xbox team in January 2003. He'd been heavily courted by Microsoft CEO Ballmer, who was frustrated that Xbox hadn't gained more ground. (It had stalled at a 23 percent market share in the United States.) Sony, Ballmer realized, was simply better at marketing. Microsoft had product marketers in its rank and file, but it wasn't accustomed to employing consumer talent that understood youth culture. "Peter played a pivotal role in Sega's decision to change business strategy," Ballmer says. "That took guts. I love that." Come to Microsoft, Ballmer told Moore, and the Xbox could be the linchpin in the company's entertainment strategy, with the potential to take on a broader role down the road. Moore, by now one of the most respected executives in the gaming business, was also being courted by game publisher Electronic Arts. But he couldn't resist a rematch with Kutaragi--this time with Gates's checkbook in his pocket.

As soon as Moore arrived in Redmond, he started to shake things up with an outsider's aggression. At 50, he's older than both Gates and Ballmer, yet Moore prides himself on tapping into youth culture, especially music. He carries two iPods and an iRiver packed with edgy bands like Bloc Party, the Gorillaz, and LCD Soundsystem. He demanded that the drab Xbox offices get a makeover, and the walls were graffiti-tagged with a selection of the names players use on Xbox Live.

The most radical departure was Moore's locker-room tone. It is not unusual inside the Redmond bubble to blindly subscribe to Microsoft cheerleading. But the former soccer coach knew when to challenge and when to rally the team. His favorite question for employees is this: Why wouldn't I want to buy a PlayStation 3? "A lot of people hate when I say that," Moore admits. But he wanted to treat the Xbox as a real consumer brand, not unlike a sneaker. "The big problem at Microsoft is that they always tell you why you need something," he says. "For the Xbox 360, you need to feel like you want it."

To understand how Peter Moore is going to make you want an Xbox 360, you have to travel to a littered parking lot on the lower east side of Manhattan. A pack of kids and a BMX biker are jumping rope, double-Dutch style. As he walks near the jumpers, Moore says, "Please tell me there are no shiny happy people here," a reference to the typical Microsoft advertising campaign that features clean-cut, smiling models.

Moore is visiting the set of the first television spot for Xbox 360, part of the largest Microsoft marketing campaign since the Rolling Stones serenaded Windows 95 with "Start Me Up." It's also a spot that "has the corporate marketing guys shrugging their shoulders," Moore says, sitting in a director's chair. "This is about taking an industry and hauling it, by the scruff of the neck, from young teenage males playing endless hours of time-killing games and bringing it into the living room."

Moore has banned technology from the commercial. He ripped up earlier storyboards for computer-graphic-heavy ads deemed "too PlayStation." Instead, the TV campaign is supposed to evoke childhood memories of playing with friends. "The idea is, if you aren't involved you're missing something," he says. To be cool, in other words, you have to be part of the Xbox gang.

Moore did extensive consumer research to prove that this wasn't the case with the original Xbox. In one case study, Xbox and PS2 loyalists were asked to argue in front of a judge why their systems were better. The Xbox gamers based their arguments on technology: "I have 7.1 surround sound. I'm immersed in this sound, this color, this beautiful world," one said. PS2 owners, meanwhile, were more laid-back: "It plays games, it's simple, it works," said one, slouched in his seat. Moore believes that the ardent fervor for Xbox actually put up barriers to growth. "We had the hard-core but nothing else," he says.

Microsoft has gone out of its way to make the Xbox 360 appealing to a majority of consumers. The bulky old design (which, Ballmer admits, especially turned off the Japanese market) gave way to a sleek and beautiful off-white box. It will work with your iPod when you plug it in. Moore even made sure that the angle at which the hardware rests in its packaging was appealing to focus groups. The system launches at two price points--$399 if you want a hard drive, $299 if you don't care.

Even that may be too much, however. "Once you hit $99, that's when you really get the mainstream interested in the system," says Michael Pachter, an analyst with Wedbush Morgan Securities. The original PlayStation was relaunched in 1999 as a $99 low-end device. It sold 20 million units. And whereas Sony is loath to let a good console die, Microsoft will stop selling the original Xbox in 2006 or 2007--a cutoff strategy that "is sort of screwing game publishers," Pachter says.

Then there's the games problem. This is an industry with a razors-and-razor-blades business model: Microsoft loses $25 to $50 on every Xbox but makes a royalty on each game sold. So far, analysts say, there's no must-have game (like Halo 3, which insiders say won't come out until late 2006 at the earliest) to drive Xbox 360 sales. "They have a bunch of good games but no blockbuster," says Midway Games chief marketing officer Steve Allison. At the same time, there's still a healthy flow of excellent games coming out this fall for the original Xbox, leading some to wonder if Microsoft might be releasing the 360 too soon.

Moore argues that a good launch lineup does not make the system. The PS2, for instance, debuted with a fireworks simulator called Fantavision, not Grand Theft Auto III (which came a year later). And while Dreamcast launched with a good lineup, industry leader Electronic Arts never supported it. This last problem, at least, will not repeat itself. EA is bullish on the Xbox 360, expecting it to sell 10 million units within 18 months. "Microsoft will do better globally," says EA CEO Larry Probst, "especially in Europe and Japan, where they have nowhere to go but up."

The real danger, of course, is that the Xbox 360 won't make enough of an impact in the crucial window before the PS3 launches. And Sony has caught Microsoft off balance once already, at the E3 trade show earlier this year in Los Angeles. Just hours before the Xbox 360 press conference across town, Kutaragi nonchalantly waltzed onto a Sony Pictures soundstage and stole the show. He announced a PS3 whose specifications were more powerful than anyone watching had expected. It would be one of the first devices to feature Blu-Ray high-definition DVD playback. And contrary to Microsoft's belief, Sony had been shipping kits to developers so they could get started on their games. "Sony showed everyone why they are on top," says Ubisoft president Laurent Detoc. Microsoft's overconfidence reminds him of an old saying in French: "Don't sell the bear's skin before you've killed him."

Moore is undaunted. "We are not going to be Dreamcasted," he insisted in a rousing speech to Xbox employees in September 2004. "I will not let that happen again." Standing in front of a giant picture of Winston Churchill, quoting from the war leader's speeches, Moore recalled the pain of losing once to Kutaragi. Question his current confidence level and he points to Sony's corporate struggles: In September, CEO Howard Stringer announced that he would lay off 10,000 employees. The parent company's woes may affect Kutaragi's ability to launch the PS3 at a reasonable price. So will Microsoft win the console war and destroy Sony? Moore starts to answer and then clams up. "Those militaristic words can't come out of my mouth," he says with a smirk. "We operate under a consent decree from the Justice Department."

If he does win the battle against Kutaragi, Moore knows that his war will be about more than just videogames. The team that Microsoft has assembled for the 360--a tightly interwoven marketing and product design group--could help the company solve problems in its other divisions, most notably digital music. Ballmer doesn't rule out the idea of the Xbox team creating a design for a digital-music player and integrating it with better player software. There's already talk that Moore could head up Microsoft's broader entertainment strategy. First Ken Kutaragi, then Steve Jobs? "[Our team] has a lot of passion to extend beyond games," Allard hints. "Listen, we're not going to keep our design guys waiting around for five years with nothing to do." Xpod, anyone?