11062007 BMO Interactive Entertainment Conference Mindy Mount.doc


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11062007 BMO Interactive Entertainment Conference Mindy Mount.doc

  1. 1. Who: Mindy Mount, corporate vice president and chief financial officer, Entertainment and Devices Division When: Tuesday, November 06, 2007 - 10:00 AM Pacific Where: BMO Interactive Entertainment Conference - New York, New York MODERATOR: We will continue with our presentation. Up next presenting, we have Microsoft. And presenting for Microsoft will be Mindy Mount, who is a Vice President and CFO of the Entertainment and Devices Group. Microsoft obviously has had a very successful launch of the 360, and certainly is poised to have a good continuation of that with 2007 going into '08. So, Mindy, why don't you let us know how things are going. MINDY MOUNT: Well, I am the CFO of the Entertainment and Device Division at Microsoft, and that's the group that does the gaming as well as our Windows Mobile, IPTV, Zune, and some other consumer products. What I want to talk to you about today is how in the last eight years we've really gone from being the new kid on the block to a leader in driving innovation and growth for the whole gaming ecosystem. I'm not going to read this to you. I'm sure you've heard this several times today already. Just a reminder, we may make some forward-looking statements, those are not updates of our previously given guidance. Look to our SEC filings for special risk factors of the business. Of course, we've got to start with Halo 3. Needless to say, September 25th was a pretty exciting day at Microsoft, and for Halo fans around the world. And I can sit and tell you all the stats, but I think it would be more fun to look at a video. Why don't you roll the tape. (Video segment.) Halo 3 has definitely become a global entertainment sensation. The first day opening sales for Halo 3 were $170 million, which made it the largest opening in entertainment history, beating both Harry Potter, and Spiderman 3 this summer. The excitement was also driven by over 10,000 retailers around the world holding their own Midnight Madness events so that individual excited gamers could wait in line and be the first to get the game, and the first playing it online with their friends. Halo has had a lot of impact on the business, clearly from the perspective of just selling the game. For example, here in the United States, NPD reported that in the first week of sales, we sold over 3.3 million copies of the game. Obviously the game, being exclusive to the Xbox 360 console drove a lot of console sales in our first quarter. We sold 1.8 million consoles in the first quarter, and, in the United States, NPD reported that in September the Xbox 360 was the top selling console. Here's the last one, which I think is sort of a phenomenal statistic. In the first week after we released Halo there were more than 40 million hours played online on Xbox Live. That's 4,500 years. Think about all those sick days that people were taking. The console and games are driving sales. If they say that consumers vote with their pocketbooks, we're in great shape where we sit right now. Total consumer
  2. 2. purchases on Xbox 360 including the console, software, and accessories, are almost $5.5 billion, far eclipsing the other consoles. To some extent, we've been out a year earlier. But even if you go and look apples to apples, so we looked at what consumers have spent on Xbox 360 since November relative to the other consoles, we're still more than 50 percent ahead, at over $3.2 billion. What are people buying? Well, I've got to tell you, they're buying games, great ones, and we have them. We're particularly excited about this upcoming holiday. At E3, I think dubbed it as the greatest holiday lineup ever. The momentum has started, and we expect it to continue through the holiday. It starts with exclusives. Those exclusives to the 360 console are going to help drive console sales, and that includes things like Halo 3, Mass Effect, PGR 4, Bioshock, some great stuff. But, we also have the key franchises that gamers are looking for, things like Call of Duty 4, Madden '08, and Assassin’s Creed. We also have our platinum hits, where we've taken some great hits; we've reduced prices on them, so that more people try them, and have opportunities to try out some of our other games. Then last, but not least, this holiday is not just about the hardcore gamers, this holiday is about games for everyone. And we have the game everybody is going to want to play, Rock Band, Guitar Hero, Viva Piñata Party Animals. All in all, we're really excited about the holiday. We sat back and thought about the holiday. One thing we want to point out, which would be a record for any console, we believe that we have seven titles this holiday period that have the potential to sell over a million units. Halo 3 and Madden are already there, and Bioshock is not far behind. Titles like Assassin's Creed, Mass Effect, Call of Duty, and Guitar Hero 3 - we all expect to be huge blockbusters this holiday season. Looking at one of those titles in particular, Mass Effect is coming out later on this month. For those of you who paid attention to E3, Mass Effect won some of the most prestigious awards: the best console game and the best role playing game. Now the first reviews are coming in, and Game Informer has given it a 97 out of 100 rating. This just demonstrates that having a great game, a great game is all about having the compelling story that drives the game. We think that Mass Effect is going to be a fabulous story and an event for all the Xbox fans. We believe heavily in this investment. We're going to drive marketing to it, and so what we would like to do is show you the commercial. You get a chance to see the premiere of the Mass Effect commercial. (Video segment.) [This next slide] is a bit of an eye chart, we'll have a test on this one later. But there are some important things on this chart that we want to point out. It's something we haven't talked a lot about - but it's becoming so stunning that we feel like we've got to bring it up now - which is Xbox is leading the industry in terms of quality of games. We went back and we looked at the top 30 rated games released so far on this generation. 70 percent of those games were on Xbox 360. On top of that, Xbox 360 has twice as many 90-plus rated games than PS3 and Wii combined. That's important, because ultimately what's going to drive a console is the quality of the games that are on it, and Xbox is way ahead of the pack.
  3. 3. So what does that mean? That means that our attach rate is leading in gaming. If you go look at where we stand to date, for example, in the U.S., NPD data reports that our attach rate is 6.6 titles per console, which is a record for any console at this stage. But, of course, we've been ahead. We released a year ahead of Wii and PS3. So if you go back and say, well, why don't we look at where we were through month 11, we were at 5.1 at that point, ahead of Wii and PS3, and I would point out that the 3.4 for the Wii includes the game that comes in the box [with the console]. So, people are really engaged with the games that we have, and they're out buying them. What that means is that Xbox 360 is the leading platform for success for third parties. Here's another way that we went to look at this. We said, let's go back and let's look at the top 10 selling games that NPD reports every month, and they do it for all the platforms, and handheld platforms, and what-not, and we looked at how many of those titles were third parties for Xbox versus how many were third parties for Wii or PS3. As you can see, the difference is stunning. We have 27 partners who were in the top 10 as compared to only one for Wii and two for PS3. Part of Xbox 360, when we came into this generation, is we wanted success not only for us, but for our third party partners. You're really seeing that promise that we made to our partners coming out in the results that we're delivering. There's another way that you can see how we're delivering this, and that's if you go and look at the total revenue, the total consumer spend on the various platforms. If you look at Xbox 360, of the over $5-1/2 billion of [consumer] spending to date, 36 percent of that spend has gone to our third party partners, compared to only 18 percent for both Wii and PS3. So, as I said, the third parties are really benefiting from what we're doing on the platform. And, of course, how can you talk about Xbox without talking about Xbox Live, which is by far, the success and the real distinguishing factor of Xbox 360 as a gaming environment. Last summer at E3, we announced that we were over seven million members, and we're going to be 10 million members by the end of the year. Everybody else is trying to get online, and trying to do things online, but I think the efforts just don't stack up to the kind of experience that we have on Xbox 360. There's a reason for that. That's part of the magic of Microsoft; we are a software and services company. We understand online better than anybody else in this space today, and we're able to develop for it, and we're able to have a consumer experience that's second to none, and it's really showing in what's coming through there. A part of Xbox Live that's been a terrific success is our video marketplace. We announced our video marketplace a year ago at this conference, and since then it has absolutely flourished. We are now the largest distributor of downloadable high- definition content. We have over 300 hours of movie and television content online and, in fact, our library has twice the hours of the leading cable provider. Not only do we have some of the content that you might expect our demographic to love, the Comedy Central stuff, but we have content for everyone. This summer we announced that we added Disney Pictures. We recently added Looney Tunes. Yesterday, we made some interesting announcements about a relationship with ESPN, and having NCAA basketball and football games available. So it has turned into quite a vibrant place. And it has the advantages. In the video world these days, everybody is trying to figure out different ways to distribute video, and there
  4. 4. are a lot of online video efforts. One of the real advantages that we have with Xbox 360, and the reason this has been so successful, is it's already hooked up to your television, so it's very easy. It's fun. You can go to a lot of sites, and you can look on your computer and watch some of the TV shows that you've seen. But, ultimately, how many people want to be sitting looking at their computer to watch TV? Here you've got your Xbox, it's already setup, you can sit on the couch and watch whatever you want, and that's led to its great success. So, as we wrap up here is first of all, we're set up for a great holiday. We have the most phenomenal line up of titles that we can imagine, so we're excited. We're leading in pocketbook. We're leading in game quality, which is leading us in game sales, and of course the phenomenal success that we're having online. But, this is more than just about this holiday. If you sit and look at where we are, you look at the momentum that we have with the third party developers. We have a great story, not only for today, but for tomorrow. We've got a terrific lineup of titles coming out, and of course Grand Theft Auto is coming. And, as you likely know, we have some exclusive, downloadable episodic content. So if you want the full Grand Theft Auto experience, you're going to have to get it on Xbox 360. And we've got other titles like Fable 2, and Halo Wars, Too Human, Alan Wake, the next Banjo title, the hits just keep on coming. So we're pretty excited about where we stand and where we see ourselves going in the next few years. With that, I'll open it up to questions. MODERATOR: I'll ask a question while we're waiting for the next one. Can you give us an idea; you've had -- obviously the Bungie guys have decided to leave Microsoft at this point. Can you give us an idea as to what you expect the relationship with them to be on a going forward basis, and how you look at allocating your own capital as far as going after developers? Are you happy with your headcount as it is in the content creation side? MINDY MOUNT: You've got a lot of questions wrapped up in there, so I'll try to kind of hit them through one by one. Why don't I first start a little bit with our philosophy around first party? When we look at first party on a platform, first and foremost, what we've tried to do with that is have it serve a purpose. So, for example, either we try to develop games that will showcase particular aspects of the console and the capabilities of the console that we want to show. For example, when you look at Halo, or you look at Gears of War, we had the high def content, the great picture resolution. We had fabulous online gaming and playing experiences, multiplayer gaming, things that we've wanted to show the consumer how great it could be, but also show developers what the potential of the platform is. And then you look at titles like Viva Piñata, where what we've wanted to do is to drive towards having more titles that are toward the casual side of the market, more titles for maybe some of the younger audience. By us leading the way, and showing that we're making a strong commitment to that market, it gives third party developers a lot more confidence that we'll be there supporting them. If they develop games along that way, we'll be leading the way in making sure that there's going to be a good market for those games. So that's been a lot of the philosophy around our first party. In terms of our relationship with Bungie, we have a terrific relationship with Bungie, and we expect to continue working with them going forward. If you go back and
  5. 5. look at the details of the deal, certainly we own Halo and all the IP related to Halo. They have their Bungie name. They’re off on a venture, we are a shareholder of that venture. We expect that we'll be working together going forward. I would characterize that a lot more as a natural evolution of a creative content relationship. I came from Time Warner, and so we had Warner Brothers, and Warner Music. It's very common in the entertainment industry when you have a group of creative talent who are highly, highly talented that with time they develop -- they get more of the economics of what they're doing. They develop new titles -- at the extreme being people like Spielberg and Madonna -- and that's just part of being a good partner to the entertainment community is, you partner with -- you identify new talent, you work with them, you develop hits, and as they grow and become talents in their own right you work with them in a different way. Much like in the theatrical business, people start doing their own production deals. They want to -- they've earned the right to have more of the economics of a game, and you support them in that, because they've been a great partner, and you're still going to do terrific in partnership with them. QUESTION: In the Nintendo presentation they showed a slide on intent to buy for the current Christmas season. So of course, the Wii looks good, but surprisingly the PS3 fairly consistently was higher than the 360. Would you like to comment on that, and what does your research show? MINDY MOUNT: PS3 has a very strong brand. If you look at PS2, the number of consoles that they've sold, and the life out in the marketplace, they've built up a very, very strong brand. To a large extent I think they're getting the benefit and they're living off of that, to some degree. So I would expect in the near-term, much as you've seen over the last few months. The hardcore gamers, the people who are really strong into the gaming market, I think very well can see what's happening with the gaming experience. They understand that if you really want to play games, you've really got to get them on the 360. But, I think in terms of the people who are a little less sophisticated about the market, they haven't come to realize that quite yet. I think over the next few months, when you just look at the title lineup that we've got coming through, I think more and more there will be knowledge in the marketplace about 360 as the place to be. So I think we have very strong momentum, it's kind of going that way. You look at leading indicators. If you look at the results that we're producing for third party developers, if you look at the number of titles that we have, all the leading indicators would say this is going to be the platform that's going to have all the games, because it's the platform that's selling all the games. Ultimately, that is going to come through in success. For consumers who are a little less sophisticated about the market, it may take them a little longer to realize that, but the momentum is in our favor. QUESTION: Would you comment on trends on digital download add-ons to existing games, and how that market is moving, and what it looks like, going forward. MINDY MOUNT: Are you asking specifically about digital download add-ons?
  6. 6. QUESTION: Add-on stuff, you buy a game, and then you can buy add-ons to the game. MINDY MOUNT: Yes, some of the premium downloadables. Well, we've been pretty active through Xbox Live Marketplace, in terms of not only offering try before you buy, also offering arcade games, but trying to come up with some episodic content. We've pushed a little bit less around spending money so that you can get better colors for your car, which are things that consumers don't necessarily feel as much value. But, if you bring them value for the money, so that you do get some episodic content, you do get an interesting new chapter, consumers love that stuff. They love the experience; they love the game; they love the opportunity available to buy more in bite-sized pieces. So it's something that we're very exited about. It doesn't work for every title. It works best for the titles that have more staying power. But, it's something that we've certainly had great experience with. QUESTION: So kind of as an add-on to that question, when do you see premium downloadable content as having a significant impact on your publisher revenues, and also what about in-game advertising? You haven't said anything about that in your presentation. MINDY MOUNT: Right. So premium downloadable content, I would say that in terms of it becoming a meaningful element, there are a lot of practical things that act as a little bit of blocks to that. The biggest one is just being the size of the games, the size of the download. To the extent that you have a big, full game, you wouldn't really want to download one of those. You'd be waiting a long time with the kind of bandwidth that we have here in the U.S. So we expect that the downloadable premium element content will be smaller bite-sized things that are much easier to be able to download with the kind of common bandwidth speeds that people have in their house, and we're excited about that. On the advertising side of things, I think you heard -- I caught the last bit of the last presentation. I think what we would say is very consistent with that, which is that we're a very strong believer in the potential of that market. Obviously with our Massive acquisition, we've demonstrated that. Display advertising is something that takes time to build. You need to, first of all, not only find the right content for it, and the right place for the content, but you've got to do research around the performance of the advertising. And more and more folks will come in, and they will try it. But to really drive a strong, vibrant ad market you've got to have good research that shows the kind of performance that the advertising is delivering, and that just takes time. It just takes a matter of being out there in the marketplace, and kind of starting to build up the expertise, and build up the time with it. So I think we continue to be very excited about it and excited about the prospect for it. QUESTION: Around the quarter you mentioned that Xbox finally turned profitable. I was just wondering if you could help us understand, what are the long-term economics of the business going forward for Microsoft? MINDY MOUNT: Right. Well, the console cycle, I would say first of all, you can always kind of look to Sony's financials to get a sense of what happens over the lifecycle of the console. But, the typical pattern is that in the initial stages it typically is in an investment mode which you have at that point. You're selling the box. The
  7. 7. box costs are very high. You often are losing money on the box, but you're getting out with some of the very enthusiastic gamers. They buy lots of software, lots of accessories and attach. Over the lifecycle of the console, you drive down the cost of the BOM, and with that you can drive your price points down. As you drive your price points down you get more folks [onto the console]. So you have a -- during the mid-period of the cycle you go into a very profitable position, as you're breaking even, if not making a little bit of money on the actual hardware, and you're starting to develop -- you've got all the software and accessories that you're selling. As you really -- as you get out in scale on the numbers -- as you get toward the end of the console, that starts tailing off a little bit. Often there are some investment expenses getting ready for the next round. At some point you have to start ramping up your investment preparing for the work ahead. I think the big question of this console that everyone always asks of this generation is, how long will this generation be? And all I would say to that is that there's a lot of uncertainty. Look at PS2. Certainly they've gone a long time and still seem to have pretty good legs on what they're doing. They have changed their box with time, kind of to bring the costs down even further, so they can get at what's practically an accessory price point at this point. I think that's great if we were able to do that. Certainly me, as the CFO, I'd find that a great model, because every year that you can draw out the console life is a tremendous year of profitability. As we look at what makes you need a new console is you've got some kind of new idea about what you want to do. At this point, from a technological perspective, this generation there were some real advances that you could see coming in - high def picture, some of the things around memory, some of the things that really said, hey, this is -- it's worth having another generation of a console, and there's going to be a lot more that you're going to be able to do with it. At least so far right now, there aren't that many things on the horizon that you think, wow, it's going to be a game changer. Of course, that may change and we'll kind of watch that. But, all of the factors kind of impact how long the lifecycle may be. QUESTION: Thank you very much. MINDY MOUNT: Thank you. (Applause.) END