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This is the story of how the Xbox was conceived, built under enormous pressure and put at the mercy of the buying public.

It speaks volumes about the nature of the hardware business that only a handful of companies have survived more than 12 months in Sony and Nintendo’s yard. Microsoft is one of them.

It has battled in the hardware race for nearly ten years, and keeps with it the somewhat ominous reputation as the last legitimate entrant.

But much of the Xbox’s survival, particularly in its formative years, is beholden to the vast reserves of cash Microsoft threw at it.

Hundreds of millions of dollars was spent just to get a foot in the same door that the likes of Atari, and even Sega, had been so ruthlessly hurled out through. All things considered, it was an outstanding achievement that the Xbox division managed to pull itself out of the red in 2008.

But the system that started it all was always just one snap-decision away from tumbling down a completely different path.

Ed Fries (pictured above right) left Microsoft as vice president of games publishing in 2004. During his tenure he secured the sale of Bungie, and Rare, and brought together a portfolio of Xbox launch titles under a punishing deadline.

For the first time in an online publication, the man central to the formation of the Xbox tells his side of the story.

1999: The DirectX Box

There were two. A silver X-shaped case, codenamed DirectX-box, is the well-known ancestor of Xbox, but it had a brother

FRIES: “I’d been running Microsoft’s internal game publishing business for several years, and at the time we published games like Age of Empires, and we bought companies like FASA [Mech-game studio, now defunct] and Ensemble, and I guess I just naturally started to eye the console business and thought it could be beneficial to expand into that.

“And then, one day, a couple of guys from the DirectX team dropped by my office, and they said they had this idea. It was called the DirectX Box.

“It was basically a PC running Windows, but they wanted to hide the windows-ness of it. So the Windows OS was going to be hidden, and it was going to be packaged and sold as a game console.

“To image what the early prototype was like, think of a PC with a hidden OS, and putting a PC game in there and it going in auto-install and auto run. So, a little bit like a console.

“It was an appealing suggestion for me personally. It looked like a way for me to get my groove in the console business without having to deal with a completely different architecture, or a completely different operating system. We were PC developers and the DirectX Box by that point sounded great. I signed up, said I would be supporting it, and we took it from there.

“But the first problem we had was that there were two groups inside the company that wanted to make a game console.”

1999-2000: The race for Gates’ signature

Micrsoft had internally been building two vastly different Xboxes. Bill Gates would be the one to decide which should move forward

FRIES: “One group had been working with Sega on the Dreamcast – they had their own proposal for a console that was very much like a PlayStation, y’know, a very straightforward game console.

“Their idea was a basic console with a disc drive and dedicated operating system; no hard-drive.

“Our idea was like a boxed PC at that point. It had an Intel chip. It ran Windows. It had a hard-drive.

“So both teams were fighting for Microsoft and Bill Gates to allow one of the projects to go forward. It was kind of an interesting battle, because obviously we [the DirectX team] ended up winning, but I ended up agreeing that the other team – the [Microsoft] Dreamcast guys – were right about how the console should look, and a few other things.

“I don’t know if you’ve seen the very first concept for Xbox – basically it was a giant silver X with a pc board attached inside. So, once we won the battle to be the team that was going to move things forward, I decided that we should take the other team’s design idea [Laughs]

1999-2000: Removing Windows

With the DirectX team having won over Bill Gates with their idea, a new problem presented itself. They had to change it

FRIES: Once we got going, the biggest step we had to take was removing the Windows OS from the Xbox. A key reason why Bill [Gates] chose our team instead of the Dreamcast guys was because our idea for the Xbox kept Windows’ OS inside, theirs didn’t.

So he wasn’t exactly happy when we told him we’d changed our minds and didn’t want to run Windows anymore.

One of the key reasons why Bill wanted Windows in the console was that it would help us get to market early. We actually originally intended the Xbox to ship a year earlier than it did – we put a date down to the end of 2000.

And also for launch, a Windows OS would have made it been easier to port PC titles over, so we’d have had a nice line-up from the get-go. But the more we looked at the user experience, the more we realised that this needed a custom operating system to work.

In the end, the final design for the Xbox was something in the middle between what our DirectX team wanted and what the other team wanted.

2000: The revolution will not be cached

Console hard drives are commonplace these days, but in 2000 Microsoft’s plan for system storage was far bolder than saves and installs

FRIES: “When we decided on using a hard disc during the console’s development, we thought it was going to be something revolutionary.

“This idea of having extra storage would mean you could pre-install games, and games could take advantage of that extra space, and we could work on digital downloads.

“We pitched to Bill and Microsoft that this hard-disc was the console’s secret-sauce – it was going to something no-one else would be able to do.

“You know, in the end, a lot of what the hard-disc promised wasn’t realised. It didn’t get used much in ways we’d hoped – not many games cached themselves, which would have made games run much faster and look better. A lot of developers just didn’t want to do that because they had to make cross-platform titles.

“But I think the whole team was right about the potential a hard-drive had, especially when Xbox Live came into play and people started downloading their games.”

2000-01: XXL

By the time Microsoft realised the Japan-centric ‘S’ controller was widely preferred to its initial rotund offering, it was too late

FRIES: “The first Xbox controller was built internally at Microsoft’s gaming peripheral group, who at the time had made things like the SideWinder joystick. They had a controller they made for PC gaming, so they took on the job and we didn’t pay that much attention to what they were doing.

“Honestly, when the first controller came out, our group didn’t give a lot of feedback on it. We didn’t have a lot of experience on controllers anyway, so we didn’t have an issue with the prototype.

“But when I went to Japan to show the console, man, they really had a problem with it. I was told a number of crazy things, like the controller should weigh the same as water in your hands.

“We heard all kind of negative things from Japan, like we couldn’t use the name Xbox because ‘X’ means death, and the console couldn’t be black, because that also was the colour of death. The first Xbox consoles we released in Japan weren’t black, in fact, they were a smokey colour – but I was always thinking to myself, ‘hang on, isn’t the PS2 black?!’

“But in the end, it made sense that we’d make a smaller controller for Japan because, yeah sure, it was just way too big for their hands. That’s where the ‘S’ controller came from. Problem was that when people internally started playing with the ‘S’ controller, everyone preferred it to the massive one – but it was too late by then, we were set for launch.”

1999-2001: ‘Anything but Xbox’

What’s in a name? Microsoft’s PR department believed the whole business was indebted to a catchy console moniker; one that couldn’t possibly be ‘Xbox’

FRIES: “We shortened the name ‘DirectX Box’ to ‘Xbox’, I suppose, for convenience. But the marketing teams really didn’t like that name at all. They came up with all kinds of names for the product, and did a lot of surveys where they’d ask people what names they liked, using the name Xbox as the control sample to measure against.

“Every time they would do a survey with the new names, Xbox always won, which was remarkably frustrating for them. Eventually they had to adopt the name we were using all along.

1999-2002: Live

It was Microsoft’s crowning achievement; risking the Xbox’s future on full online functionality when the rest were still making tentative steps into the online world

FRIES: “Xbox Live was another thing that came from the hardware side of the product, from J Allard’s team. There was always that idea that Xbox users could go online for multiplayer play – that goes back to the very roots of the Xbox concept.

“One of the most controversial choices at the time was whether the Xbox should have a modem in it or not. It sounds bizarre now but most people at the time were connecting to the internet via a dial-up modem.

“So the decision to add a modem in there was fought and fought and actually went all the way up to Robbie Bach. There was a big difference of opinion because at the time there were a lot of dial-up multiplayer services, and we knew if we supported that we could get a lot of people playing.

“The idea of having an Ethernet connection in your home was pretty new at that time, and not many people had it.

“And I remember that this was one of the clear demands that Robbie made, he said we were building the machine for the future, that we were going to bet on people signing up to broadband.

“Once he made that decision. No-one went back.”

2000: Bungie’s jump

Mac-loving Bungie enraged Apple CEO Steve Jobs when Microsoft brought the studio to Xbox. But before the angry phone calls and eleventh-hour bids, Bungie was on the brink of closure

FRIES: “I mean, there’s no way I thought Halo would be as big as it is. It’s a phenomenon. The whole story about how we bought them starts with me and the one guy I knew at Bungie, [Ex-vice president] Peter Tamte, who I met and got on with at an industry event.

“I had played a bunch of early Bungie games and was a fan of their work, but I didn’t know the company very well.

“One day I got a call from Peter and he told me Bungie was in a bit of financial trouble, and he was looking to sell the company. He told me another company was interested, and asked might we be interested.

“That was at the same time when I was starting to look around, quite desperately, to figure out how to get this launch line-up for the Xbox within two years. At the time Bungie was showing around this concept and trailers for a game they had called Halo, and it looked pretty cool.

“So I was really interested in buying the company, and I started talking to other people at Microsoft about it, and we began to put a deal together, bought them and moved them into our offices in Redmond.

“It’s funny how important Bungie turned out to be for us. They were going through financial troubles when asking us to buy them; in fact they already sold a third of their company to Take-Two.

“They were one of the last companies that self-developed and self-published games, and at the time such a practice was becoming harder and harder to achieve.

“The deal we had was complicated, because Take-Two owned a third of them, so what we did was split the company up; we got all the people, all the developers, and Halo, and Take-Two got everything else, Bungie’s whole back-catalogue of games. We also agreed to finish developing Oni for Take-Two, which was being made by a branch of Bungie down in California.

“So the guys finished up Oni and shipped it for Take-Two and then joined our Halo team up in Seattle.

“The funny thing was that Bungie was a Macintosh developer at the time – they were the premier Mac team in fact, but that wasn’t a great market position obviously because Mac had so few games companies. I think that’s why they got into trouble in the first place.

“We paid for Bungie in the tens of millions, which I think was a fair price for the company. In retrospect that figure now of course seems like a bargain.

“The other funny thing was that, as soon as we announced we bought Bungie, [Apple CEO] Steve Jobs called. He was mad at [Microsoft CEO Steve] Ballmer, he phoned him up and was angry because we’d just bought the premier Mac game developer and made them an Xbox developer. So, during the day, I got mail from Steve Ballmer asking me to phone Steve Jobs and calm him down about the whole thing [laughs].

“Anyway, we did this deal with Apple where we’d port some PC games to the Macintosh and help Peter Tamte create this company to do it, and I had to go to a Mac developer conference and get on stage and talk about this whole new partnership. It was a pretty strange time.”

2000-2002: The Rare cut

Buying Bungie revived an old Apple rivalry, but snatching Rare from Nintendo – and Activision – proved to be a far more complicated deal

FRIES: “Pretty much, every time we made an acquisition, I needed to know someone at the company we were thinking of buying.

“I had the chance, a few years before the Rare buyout, to meet with the Stamper brothers and get to know them. It’s crucial to do this because suddenly it’s not a big corporate empire that wants to buy you, it’s a person.

“So I knew them and we got on, but of course Rare had a contract with Nintendo.

“Nintendo owned half of Rare, and had an option to buy the other half. By the time we started getting interested, that option had passed its deadline and effectively expired, though Nintendo had argued for a temporary extension, which they got.

“That extension began to expire again, and by that point us [Microsoft] and Activision got involved in the conversation to acquire Rare. Still at this point, Nintendo had the priority option to buy the other half of Rare at the price we were offering.

“So, there’s a problem; if we drive a hard bargain and put in a low price for Rare, Nintendo would have the chance to buy at that low price and probably would. So, the price was high.

“Also, there was a bit of a bidding war between ourselves and Activision – a war which they won at first. They made the best initial offer, and Rare looked at both of us and, from the way I saw it, was more interested in partnering with Activision. I think it’s because they wanted to be third-party, independent of all platforms.

“But then something happened between them and Activision – I don’t know what it was – but relatively far along in the deal things got cold, and we made a counter offer. Our bid was bigger than Activision’s, but Activision was still in control of the deal at the time. The prices were getting so high, by this point, that it didn’t look like Nintendo was willing to participate.

“So, very near the end, Activision backed out of the deal, for reasons I still don’t know, and Rare came to us.”

2001: ‘Mediocre’ Halo

Cynics ‘smiled and shook their heads’. Rumours of missed deadlines arrived, vehement criticisms of a reduced feature set had spread, and critics were ready to mark Halo as a footnote of the Xbox’s launch line-up.

FRIES: “I remember, distinctly, the E3 before the Xbox launch – we were still running our games on half-speed development hardware. Bungie had to show its game half-speed, as did all the Xbox developers, but frankly the Bungie team got a lot of negative comments from journalists.

“But at the same time we’re play-testing it in Redmond, and we think it’s cool, in fact we think it’s really cool. I was demonstrating the game to other companies just to show them what the Xbox could do, but at the time I’m not sure Halo was seen as the star launch game. We had got Lorne Lanning to move away from PlayStation development and build Munch’s Oddysee for Xbox, and I remember us talking about that a bit more than we were talking about Halo.

“We also had Project Gotham Racing from the Metropolis Street Racing team, who were amazing – so we weren’t placing our bets on one title, until we got closer and closer to launch, when it became more and more clear to us that Halo was going to be a big game. We threw our marketing money behind it, and the game single-handedly made the Xbox popular. Without Halo it would have been a completely different story, I think.

2001: Launch day

Bringing an end to a tumultuous 24 months of hardware engineering, deal brokering and copious last-minute changes, the Xbox was finally at the mercy of the market. For Fries, it was the end of a poignant chapter in his life

FRIES: “You’ve got to remember, this project went through in rapid speed. I had about two years to bring a whole console launch portfolio together; it was madness.

“But I do feel privileged to be part of building the first Xbox, it was an amazing time. Everything went beyond my expectations as the Xbox grew into such an important device for the company – and it was stressful, but it was fun, going all over the world, meeting all different developers, launching the product in Times Square.

“We launched the original Xbox about the time my first son was born, I remember that so vividly, it was an amazing amount of fun to be working for Microsoft and I’m delighted I had the chance.”