Robbie Bach, former president of Microsoft's Entertainment & Devices Division, speaks to the Northwest Entrepreneur Network today on the subject of "intrapreneurship," drawing lessons from the Xbox and Zune.

Former Microsoft executive Robbie Bach led the company’s entertainment division through the rise of the Xbox business, which has become a success, by many measures, after billions of dollars of investment and some major bumps in the road.

He also led the division through the launch of the Zune music player, which is “probably universally viewed as less of a success,” as he puts it, charitably.

So what can be learned from the two experiences? Bach compared and contrasted the Xbox and Zune businesses and shared some inside stories during a Northwest Entrepreneur Network event Seattle this morning. The topic was “intrapreneurship” — the buzzword for entrepreneurial projects inside major companies — but as Bach noted, the lessons apply to traditional startups, as well.

Here’s a summary of his main points, with excerpts from his comments.

1) Focus on a discontinuity

Robbie Bach with the original Xbox. (Microsoft photo)

In the case of the Xbox, the Microsoft team tried not just to chase Sony’s PlayStation 2 but to think about video games differently. They concentrated on two discontinuities — breaking with the status quo in the games business. First, they put a hard drive in the original Xbox console.

“It turns out to be super-expensive if you don’t structure it right, and the first time around we did not, and so it was an expensive way to get into the marketplace, but it made our product different. It enabled downloads, it enabled a whole set of things to happen that couldn’t happen on the PlayStation 2.”

Second, they focused on broadband, vs. dial-up Internet access, in the form of an Ethernet port built into the original Xbox. That opened the door to online gaming and the subsequent launch of the Xbox Live service.

“In 2001, this is not a joke, we were in a meeting with Bill (Gates) and a bunch of the rest of the senior staff, and we said, we made a decision to take the modem out of Xbox. Bill said to us, that’s the craziest thing I’ve ever heard. So we had a three-week email debate, and had to go back and have a meeting and convince Bill that taking the modem out was the right thing. Today, some people in the room probably don’t even know what a modem is.”

With Zune, Microsoft missed the big discontinuities.

“If I had hindsight, 20-20, and could do Zune over again, we would skip portable media players completely. We would go to what, at the time, was the Windows Mobile team and say we’re going to produce the coolest music service for your phones ever. The portable music market is gone and it was already leaving when we started. We just weren’t brave enough, honestly, and we ended up chasing Apple with a product that actually wasn’t a bad product, but it was still a chasing product, and there wasn’t a reason for somebody to say, oh, I have to go out and get that thing.”

2) Differentiate through marketing and branding

With the original Xbox, the company was able to drive home the point that the console was more powerful than its competitors, and focused on Internet gaming.

“On the Zune side, and this is as much my fault as anybody’s, I think our marketing message was very confused. I don’t think people walked away saying, this is what Zune is and this is why it’s different. This is why I have to have it. We did some really artsy ads that appealed to a very small segment of the music space, and we didn’t captivate the broad segment of music listeners. Not complicated.

3) Find partners who want you to be successful

“When you’re doing a startup, you need friends. It’s just the way life works. It turned out we were able to convince retailers and publishers like Activision, Electronic Arts and others, that it was a good thing for Microsoft to be successful, because if we were not successful, the only game in town was Sony. Being dependent on somebody else was bad for them, and so they supported us disproportionately to what they should have, mathematically.”

That wasn’t because they loved Microsoft. It was purely out of self-interest on their part.

On the Zune side, Microsoft tried to do the same thing.

“It’s not like we didn’t try but — I don’t know how to say this politely — the music industry just didn’t get it. They just didn’t figure out that being dependent on Apple was bad for them. And they were so hooked on the drug of what Apple was supplying them that they couldn’t see past that to realize that they needed something else to actually drive their business. The label business, the music industry, has never recovered from that.

“If you look at business value, Apple took whatever business value was in the label business and erased it. That’s not a complaint about Apple, good for them. But they erased that, and created some new value for themselves.”

4) Capitalize on your competitors’ mistakes

Microsoft had clear competitors in the launch of both Xbox (Sony, Nintendo) and Zune (Apple).

“Some of the success of Xbox was due to the fact that Sony did some really not so smart things. They mismanaged their 70 percent market share. It’s a long conversation. The transition to PlayStation 3 was really, really bad. And really hard. They mismanaged their partners, they mismanaged their cost structure. They made their next platform so complicated that developers couldn’t develop for it.”

Apple, on the other hand, “executed incredibly well.”

“They have made very, very few mistakes over the last 10 years. It’s remarkable, actually. I give them a lot of credit. I don’t always agree with everything they do, but they’ve made remarkably few mistakes. If you’re in a startup and  your competition doesn’t make mistakes, the world is a hard place, and it doesn’t matter how much money you have.”

Bach also pointed to other successful startup projects inside Microsoft, citing examples including Outlook, Windows Azure, PowerPoint, SharePoint.

At the same time, he also acknowledged the company’s failures such as Bob and Kin, and he talked about the billion-dollar write-off that Microsoft had to take because of Xbox malfunctions on his watch.

That was “the most painful thing in my life,” he said, “but the company persevered through that.”

Bottom line, he said, the lesson is that a “startup” inside a company is similar in many ways to a real startup on its own, apart from obvious differences such as culture and the level of funding. The likelihood of success is the same, relying on factors including the soundness of the strategy, the caliber of the team, the quality of the product, partnerships, and a culture of success.

“Even if you do those things, some startups fail, and that’s just the way the world works. It’s a painful process. That’s true in a big company, and it’s true in a small company. (With Zune and Xbox) the reason one succeeded and one failed had nothing to do with them being part of Microsoft. It had to do with the fact that the batting average at startups is actually not that high. The bar is high to be successful.”

Bach, who left Microsoft in 2010, these days is involved in a variety of projects, including roles on the boards of the Boys & Girls Club of America, the U.S. Olympic Committee and Sonos. He and a partner are currently in the market to buy a small business, not in the technology industry.

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  • MagBill

    Robbie is good people.

    • Guest

      Great guy. Terrible executive.

  • Guest

    Hi Robbie.  I was surprised to see that you are on the board of Sonos.  That company is unfriendly to Microsoft in general and super unfriendly to Zune Pass in particular.  Would love to see that change.

    • Guest

      In case you hadn’t noticed, offers for his services weren’t exactly pouring in.

  • zato

    “Microsoft had clear competitors in the launch of both Xbox (Sony, Nintendo) and Zune (Apple).”

    and Zune (Apple)?  
    Wake-up Microsoft/Geekwire.

    • Todd Bishop

      Sorry, not understanding your point.

      • zato

        Ignore what I wrote.

  • Naterz

    Just sold my XBox 360 and got a PS3 cause I was tired of paying $9.99 a month just to watch NetFlix that I already pay $8 a month for, or use Facebook, or Twitter, etc. on it.  Next up, Windows Phone 7.  Going back to Android.

    I wouldn’t mind having to pay for online gaming, which I actually never do, but paying to use free services or services I already pay for (like Zune Pass, Netflix, YouTube, etc.) is simply a bad value proposition.

    Console also makes it hard to get any decent value out of the Hard Drive space in it.  You have to go through hoops and bounds just to get your own music onto it, for example.  The PS3 is much better as an “Entertainment System.”

    As for the Zune, he’s exactly right.  The whole approach was terrible.  Zune should have been integrated directly into Windows Media Player.  They should have used Standard MTP, and they definitely should have integrated it into Windows Mobile (and later Windows Phone as it is).  They needed a client that could play the DRM’d music on Macs from the outset.  They locked themselves out of the Mac Market going the route they did.
    In the end they not only crippled their own service/adoption, but indirectly crippled their own product cause the media synching in WP7 leaves much to be desired, having to manage stuff in Zune Software independently of WMP – and the fact that Zune is a rather crippled and rudimentary media player to boot.

    One thing Apple tends to get right is how to retrofit their products and integrate it with newer products, and they tend to do this at lightning speed.  Zune software was thoroughly unnecessary and only complicates things for those of us with a lot of media on our PCs/devices.  The Zune devices also left much to be desired.  They completely botched the Zune HD by never growing an app ecosystem and barely supporting it with their own products.  My iPod touch is infinitely more capable than that thing due to the apps and extra hardware in it (Front/Back CAM, bigger higher res screen, etc.).

    • AS147

      Hmmm already paying for two services so chucks a gaming console he also invested in….hmmmmmmm

      Me thinks he is just up for a change rather than there being anything wrong with the Xbox service.

      • Naterz

        Not hardly. The XB360 was a birthday gift (I got the choose, and chose the XB cause of the bigger HD before I knew it was a PITA to get anything on said HD). The issue I have is that every service I pay for, I end up having to double up to use on this console.

        Zune Pass




        They’re all unusable without paying more money to Microsoft. On a PS3 I can still game, and I don’t have to pay extra just to use their Music/Video Service, Netflix, etc. on their own device or my other devices.

        In the long run, it will save me money. It’s simple economics.

        What you’re doing is trolling.

        Paying to use YouTube, Facebook, Twitter on a Console is dumb.

        Paying to use services I’m already paying for like Zune Pass, Netflix, and Hulu is even dumber.

        It’s a logical change. I’m saving money (whether or not you think it’s a lot is your opinion). You’re not. You Mad?

        • AS147

          Geez, no meed for insults I was just wondering ! If you had provided this information beforehand then the context would have avoided the need for clarity.

          I am not trolling as I don’t find getting stuff on the HD difficult at all. I also don’t pay for or use Xbox live but still have no problems playing any games so I wonder why you are having issues.
          Still it’s your choice and I am sure you will be happier having made it.

          Good luck with your gaming and stay happy (the main point of gaming after all).

          • Naterz

            That’s fine. Point is they mind as well should have just sold the console with a mandatory XBL Gold Subscription, IMO. There is no concept of online gaming without XBL Gold. You don’t need to pay Sony for Online Gaming on the PS3, that’s how I’m having issues.

  • jefffromvirginia

    In other words, you were at least 5 years late.

  • Cindy Engstrom

    His lack of actual startup experience + being in possession of copious budget causes this piece to fall flat on its face for me.  Humorous.

  • beauty667

    apple really derailed and beguiled those poor music comps/execs who were running the digital side of their businesses sooo well before.. yup

    • mtngoatjoe

      I think they were happier to blame pirates for their failures than the bad music that people don’t want to pay for. What Apple really did though was prevent the subscription model from being the only game in town. You could just see music execs drooling over subscription services (and who could blame them: pay forever, own nothing!)

  • Marykate Clark

    A bit like Sun Tzu’s The Art of War, but more compact.  =-)  

  • Guest

    The best management advice Bach could give anyone: don’t do anything I did.

    Xbox is a success? More than twelve years later, it still hasn’t recouped what was spent on it. He failed with Xbox, Playsforsure, Zune, IPTV, MediaRoom, Media Center, Windows Mobile, and tablets. He was in charge of retail during the period that Apple built out a retail empire. Seriously, what did he ever succeed at?

    • Brian Kane

      Yes it has… and then some.  The Xbox project is extremely profitable over the course of all consoles.  

      • FalKirk

        Serious question:

        I know that Microsoft went 5 billion dollars in the hole before they started to make a profit on the X-Box. Since then, the product has made a profit every year but when, if ever, did it break even and how much net profit has it made over its lifetime?

        • Guest

          Try more like $8 billion. And no, the subsequent profits have not yet been sufficient to recoup that.

      • Guest

        Wrong. It still isn’t profitable over its lifetime.

    • AS147

      Do me a favour. Some of these products have actually been very popular and some even successful. They then ran their course. This does not mean they were bad projects.

  • Phred

    The Zune was difficult to use.  It was not intuitive.   I really wanted to like it, but it was simply  full of senseless steps that made no sense (eg, it would not let you delete a song from your playlist without going to the one of four screens and finding the correct command in a list someplace that wasn’t where a reasonable person would think it should be).
    It looked great and I wanted to like it… But I broke down and bought an iPod after that and then 5 more of different variations of iPod.  My point is they had a chance at it, but if your first product is lousy and you have high level competition, you wont get a second chance.

    • AS147

      Never used one but it is the first time I heard it was hard to use. Even when looking on youtube it seems plain sailing to me.

  • Hozo1

    ‘apart from culture and funding’ … culture and funding is everything entrepreneurs are about … there is nothing after that ..  typical MS guy … does not understand consumer behavior at all … MS so misses the human factor

  • Guest

    Bach pretending anything he did at MS was a “startup” or successful. Laughable.

    His real claim to fame is that he’s one of the few executives in technology whose record of failure exceeds Steve Ballmer’s.

  • ElektroDragon

    I used to be a 360 fanatic until they kept changing the dash for the worse, flooded it with ads, and creating a very slow and confusing marketplace, and made everything take forever to load for people who bought their games on another console in the house.  PS3 has none of these issues and I enjoy it a lot more nowadays.  Only wish I had bought most of my collection on PS3 instead.

  • FalKirk

    “In the case of the Xbox, the Microsoft team tried not just to chase Sony’s PlayStation 2 but to think about video games differently.”

    Exactly. Microsoft chased the iPod and the iPhone and now they’re chasing the iPad. Instead, of asking how they could build a better iPod, iPhone or iPad, they should have been asking:

    – What is the future of music?
    – What is the future of mobile computing?
    – What is the future of computing?

    Microsoft’s scope has been too narrow. They have been trying to create better versions of existing products when they should have been trying to create better categories of computing.

    An aside that may be the whole point. As Mr. Bach said, it didn’t hurt the X-Box that Sony, with 70% market share in gaming consoles, executed so poorly and it didn’t help Microsoft that Apple, with 0% market share in smart phones and tablets, executed so brilliantly.

    • David

      “Instead, of asking how they could build a better iPod, iPhone or iPad…”

      Microsoft has never built a better anything, it’s not in their nature. Microsoft is good at trying to mass produce the stuff other people make but they have never had this idea that innovation was important. 

  • Stewart Farr

    Its a shame, I loved all the tech behind the zune………but it simply failed to deliver on so many fronts (none of which were music based).
    – The wifi was only for doing limited stuff (effectively making the wifi useless as a function)
    – The touch pad was nice………but not required
    – There was no zune marketplace outside the US for 5 YEARS!!!!
    – Worst marketing EVER!

    Which is a shame because:
    – The sound quality was amazing!
    – The storage was good
    – The screen was fantastic
    – It connected automatically to most Microsoft devices (no additional software required)
    – Battery life was good
    – It was a strong unit

    But at the end of the day some cheap chinese manufacturer is going to easily copy these things over time if you don’t have the social marketplace to support the product better with new features. People still have their first ipods on the bookshelf…….. and it wasn’t a very good player at all.

    • AS147

      Agree absolutely. It was doomed when they limited the market to the US and ran with their typically poor marketing

      • Guest

        MS has marketing?

  • mp

    He is way off the mark and out of touch. Reading his ideas in this article clearly show why he is no longer leading the E&D Division at MS or any other company.

  • PJLeDorze

    Great article with Robbie Bach, spot on in everything he said. I worked for Xbox and Zune for 3 years, always enjoyed working with Robbie and greatly respect his business IQ.

  • Redbrian

    With the budget he had, it would have been amazing if he couldn’t launch the Xbox. MS execs love to congratulate and reward themselves when all they do is throw huge $s at a product which smarter execs could have done better.

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