Q: Sony's planning on launching their PlayStation 3 around six months after the Xbox 360 launches. They've gotten some rave reviews for their new device. Have they stolen some of the 360's thunder?

I don't worry about great visuals that they showed that weren't actually running on real hardware. It doesn't matter. Gamers don't make their purchase decisions based on movies that were shown in May for products that come out in March. They just don't.

Q: When the original Xbox came out, Microsoft showed off what you could do with off-the-shelf, PC hardware. In contrast, you're going with customized hardware this time around. Why the change in direction?

Part of it was the necessity of getting to market quickly, we had to go off-the-shelf. There wasn't an alternative. You can't build a game console with highly customized silicon components with the time they had for the Xbox . We barely did it, in some ways, with the off-the-shelf stuff.

Part of it was our experience as well. We thought that it was very, very important to get game developers a great platform that they were familiar with.

But the thing about going to custom hardware is it will give you the best price-performance ratio. The second thing it does is it allows you to control costs.

Intel doesn't make 733MHz parts anymore -- except for us. So they don't cost reduce in the same way as custom hardware . It's very important for us to be able to manage our costs, so our price curve and our cost curve approximate one another. On this past generation, they just didn't.

Q: You've lost $2 billion or so in this division thus far. Do you expect to be consistently profitable this time? What's it going to take to do that and when will it happen?

You can't be consistently profitable, because the upfront costs are so high. So the first two couple years are pretty tough. But we intend on selling an awful lot of these things. We've really designed the business around scale this time, and I think that once we get over that initial curve, it should be a pretty healthy business for the company.

Q: A couple of reports have mentioned that the Xbox 360 games you and your partners are demonstrating are running on emulators on Apple's Macintosh computers. Did Bill Gates grit his teeth when he read that?

The Xbox team thinks different!

Q: They think different? I like that. I'm sure Steve Jobs would like that, too!

Well, I have more G5's than any human being on planet earth right now. That was the closest hardware system that was out there. Even though we're doing highly customized parts, they still are derivative of off-the-shelf parts. So we've given them a good approximation. When we get the final hardware, the performance is just going to skyrocket.

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