In the wake of consumer backlash, Microsoft in June backed off a number of its policies relating to digital games, but that doesn't mean the company has abandoned its vision altogether.

A digital-only future for gaming is "going to happen," Xbox director Albert Penello told GameSpot during PAX Prime recently in Seattle, Washington.

Though Microsoft is sticking with a disc-based model for the Xbox One launch, Penello said the company plans to support trading, loaning, and reselling of digital games down the road.

"I think we need to do that. That has to be part of the experience," Penello said.

During our conversation, Penello touched on the possibility of backwards compatibility coming to Xbox One, how the company feels about being the most expensive console this holiday, and why Kinect is bundled with every system.

I think I heard a quote, it might have been from Major Nelson, that you guys had started over with essentially a blank slate [for the Xbox One]. When you were designing the Xbox One, how much of the legacy of the platform did you want to bring forward, and how much did you want to leave behind?

I think you always start with what do you want to do. Because you absolutely get a chance to start over. So that is always the first question that you ask. What are the things that we want to do? And then as you're working through it, you decide to make trade-offs about what stays and what carries forward. Certainly, we wanted to be a great next-gen game [console] delivering awesome next-gen graphics. Certainly, we wanted to have a great multiplayer environment. Certainly, we wanted to be able to do other types of things. But like, you definitely start with all of the learning you had on [Xbox 360] and say 'god, if we could do this all over again, how would we architect the system differently? What would we have done if we knew we were going to do these things?' That's always the first question you ask.

One of the things that's really surprised me is that my Xbox 360 is still in my house right now. It's an eight-year-old device. It's the only eight-year-old piece of technology that I use today. That kind of tail that it's enjoyed is really impressive. How are you going about future-proofing the Xbox One to have a similar eight, nine, fifteen year tail?

So, you probably heard us talk about the Xbox One architecture; this idea that we have multiple environments that the box can run in. That's probably the least publicized but the most significant thing that we're doing in the system to keep it future-proofed. A lot of people don't realize this, in the old days of gaming--and I've been in this business for a long time--if you wanted a new dash…you bought a new console, that's when a new UI came in. When we did NXE, we changed up the blades to that new design, that was like revolutionary. And that's one of the things that has allowed the Xbox 360 to endure. But we didn't build the system anticipating that we were going to do that.

We architected Xbox One so that the game environment and the application environment are totally independent. So the game performance, just like a game console; developers can write to the metal, keep making the games better and better and better. And we have this other area over here that we can play in that can run on top of it, that can run side-by-side; you can have current things running without touching the game. That's going to give us a lot more flexibility to adapt and change than we had on the Xbox 360.

The Xbox One is going to have a pretty significant digital ecosystem, I would say. You're really making a stance there. Do you see a digital-only future someday happening?

"We probably said [digital-only] was going to happen sooner than people were ready for it to happen. And I’m glad we've gone back."

Yeah. It’s going to happen. I don’t think there's anybody in the industry; no matter what you thought about our original policies around DRM; I don't think there’s anybody that doesn't know that someday, it’s going to happen. Right? It’s already happened on tablets and smartphones. It’s mostly there on PC. If you look at what’s happening with Steam. And just the congregation of gaming on Steam. It’s already basically happened with music and it’s on its way to happening with movies. So it doesn't take a big leap to say it’s going to get there. For us, we probably said it was going to happen sooner than people were ready for it to happen. And I’m glad we've gone back to the disc model. People have to accept it. The Internet bandwidth caps have to support it globally. Internet infrastructure has to support it globally. So it’s going to happen, it’s just a matter of time.

Another thing that comes along with digital games is…something that holds them back is you can't resell them right now. There's no kind of commerce between users. Is this something Microsoft is potentially interested in?

Well, actually I think if you go back and you look at some of the things we said, that was one of the places that we were actually trying to pioneer. We were trying to implement the ability to trade [and] loan digital games with your friends which is something that no one else was doing. I believe, in retrospect that people have calmed down and gone back and actually looked at what we said, people are starting to understand, ‘Wow, they did want actually to allow me to loan and trade’ which other digital ecosystems don’t want to do. And so, yeah, I think we need to do that. That has to be part of the experience. Right now, we’re focused on launch and we switched the program back to discs, because that’s what customers wanted.

But you're open to revisiting that stance?

I get a lot of mails saying ‘god, please bring back the family sharing.' We’d love to figure out how to bring that back. I still think it was a good idea. Maybe it was a little too soon for some people, but I still think there were a lot of good ideas in there. And we’ll bring it back when the time is right.

Was the Xbox One ever conceived, at any level, without a disc drive?

No. Because I think right now we realize the size of the games that are coming now. What we conceived was that the disc was the delivery medium. But that the licensing and all of that was happening in the cloud. So yeah, you're always going to need a disc. But for some people, there will be a time when that's not necessary any more.

Kinect is something that, you've talked about it as a core component of the Xbox One; that the Xbox is Kinect. There is no difference. But it's still something that I've seen as kind of a sticking point for people online. Why is Kinect such an integral part of the Xbox One?

I think one of the things that's happening is when we launched the Kinect on Xbox 360, it came five years in on the platform; it was an accessory. And it did some really cool stuff. But I feel like it never reached its full potential. Because developers have to decide; does my customer have it? Who’s going to have it? If I do this game, what percentage of users have it? And one of the things I think we’ve learned, is that when you launch something as part of the console, it changes how it gets used.

"[Kinect for Xbox 360] did some really cool stuff. But I feel like it never reached its full potential."

Today, you can't use your voice on Kinect for Xbox to buy a movie. Eventually, you stop and you have to pick up a controller. On Xbox One, we've architected the whole UI. I can literally just talk to it, ask it for different genres, ask if for new releases; and I can change whether I want it in SD or HD, purchase it, start it, play it, pause it, fast forward it, rewind it, all with my voice. The idea, today, if you want to switch games, you've got to make a commitment. I have to get up. I have to take the disc out. I have to boot back to the dash. I have to put a new game in. On Xbox One, 'Xbox go to Ryse.' New game starting.

That kind of stuff, it's easy to pick it apart when you haven't experienced it. But I believe that everybody is going to…want to interact with their console in that way in the future. It is going to be so much faster [and] so much more convenient. And that's just the voice stuff. The recognition stuff, the sign-in that we can do. You can walk in front of the console, it recognizes you. Now we can have six of us in the room all signed in with our own profiles. That kind of stuff, when people get to use it, I think it will be really obvious why we bundled it with every box.

Do you think this is a major advantage you have over your competitor, who is selling [motion control] as a peripheral?

Obviously I can’t speak to what Sony’s doing. I don’t know what their plans are with their camera. But I think, they had this with Move, we had it with Kinect versus Nintendo with the Wii. When you bundle it, you get more innovation, you get better and more interesting types of experiences; so I do think that bundling it in every console, and the fact that technology is so much more advanced than what anybody else is doing; yeah, I do think it is an advantage.

Because you're going to be so embedded with TV providers [for Xbox One], is there any chance that we could see a subsidized [Xbox One]?

I think there will be a time and place to bring that back. I think at launch, most people are saving up and they’re going…they want in. The subsidized model really makes a lot of sense towards the end of the life. People are more price sensitive. They are more cost conscious. It's a model I like; I’m sure we’ll bring it back. But not right now.

Do you have an Xbox One in your home right now?

I do.

What's one thing that's surprised you or stood out compared to having it in the lab or in the office?

The voice stuff works awesome. When we demo, it's always in these artificial environments. But when you're actually sitting on your couch with your feet up and [see] how good it works, how responsive it is. It works great and it's so much easier to use now.

The Xbox One taps into the power of the cloud quite a bit. We're seeing one of your competitors, Sony, doing backwards compatibility through streaming. Does the cloud-powered nature of the Xbox One leave it open for things to change in the future for something like that?

"But there are so many things that the servers can do. Using our Azure cloud servers, sometimes it’s things like voice processing. It could be more complicated things like rendering full games like a Gaikai and delivering it to the box."

Yeah, absolutely. That's one of the things that makes [the cloud] at the same time both totally interesting and hard to describe to people. Because what the cloud can do is sort of hard to pin. When you say to the customer, we want the box to be connected, we want developers to know that the cloud is there. We’re really not trying to make up some phony thing. But there are so many things that the servers can do. Using our Azure cloud servers, sometimes it’s things like voice processing. It could be more complicated things like rendering full games like a Gaikai and delivering it to the box. We just have to figure out how, over time, how much does that cost to deliver, how good is the experience.

As things become more dependent on the cloud nature of things, it seems very dependent on Microsoft staying in business and staying very interested in gaming.

I think that's a great question for the industry. Because I could point to the fact that there are still plenty of games on Xbox One and Xbox 360 that are total offline mode. You could ask the same question for World of Warcraft. Like someday, what happens if Blizzard turns off the switch? Where's all my money, where's everything? That's a great question the industry is going to face. And it's going to be game-dependent.

There's a lot of discussion today in this post-NSA and everything going on about privacy, and then you've got the Kinect sensor pointing at you. I know you can turn it off, you can turn it the other way. But since it's connected to the Internet, people are always going to the think that the government can have a backdoor to anything that's connected. What's Microsoft's take on this?

This is a great one. The answer to this one for us was very simple and everybody misinterpreted it. Unplug it. Like, originally, we had said people who understand the technology behind this would quickly get to 'If I have this 1080p HD camera that's always on, how is all that data going to get off my machine?' So first off, it's somewhat implausible, technologically that you would be able to have high-definition video feeds being served out of your house without you knowing about it. But let's just pause on that for a second because not everybody's technically savvy. We sort of felt like 'of course people are going to understand that's not going to happen.' Some people don't understand. It's just a thing that people feel. So that's why we said, you know what, just let people unplug it. If you really just don't believe or are uncomfortable or whatever, we let you unplug it and then it's off.

To your point, laptops, phones, security cameras everywhere; if you believe that that thing is happening…I know we're not doing it. I'm not worried about it in my house because I know what's happening. But you know, we let people unplug it if they're really super-sensitive about it.

As the most expensive console this holiday season, how are you going about communicating your value proposition against those others?

It’s up to us to prove that it’s worth $100 more. I think it is. I think we do more. I think our games are better. I think as people start to experience Kinect and see what it can do using voice, I think that's better. I think the ability to have an all-in-one system where you can plug in the TV, that’s better. I think we’ll have a better online service.

I just believe that we’re going to have a better system. $100, when you’re talking $400 vs. $500 [shrugs shoulders]. I don’t believe it’s going to be the deal-killer.