The first-party apparatus of every console is an integral part of its success; looking at the hype and sales generated by games like Halo: ODST, Wii Fit, or Uncharted 2 is testament to that. Earlier this year, Microsoft named Phil Spencer corporate VP and head of worldwide studios.

Having recently served as the GM of worldwide studios and worked in England with Rare and Lionhead, among others, he moves into the role as the platform is about to undergo its most drastic upgrade since launch: the Natal peripheral, which Microsoft is promising will fundamentally change the way games are played for all 360 gamers.

Here, Spencer speaks about the overall first party strategy for the company, its specific Natal strategy, and its experiments with free-to-play, microtransaction-based titles (Joyride) and ad-supported games (1 vs 100).

How has your transition been?

Phil Spencer: Actually, the transition happened last fall when I came back. I was in London for a couple years, working with Lionhead and Rare and similar content work in Europe. I came back as the GM of Worldwide Studios, and I've been recently promoted, which is what the announcement is -- I've been promoted to the new title.

But yeah, the new head of Worldwide Studios [role] started when I came back from London last October. And it's been a good time for us. Think about when I came back, Natal was something that we were in the middle of incubating; trying to make sure that it was going to be something that really both resonated with our creators as well as the customer in the end. We started to put our head down towards E3 and see if that would be the right time to unveil, and there's been tremendous success with that. It's been great to see.

When does Natal come out,  and what titles are going to work with it?

PS: Our announcement at TGS [was] that, after just three months, we've got 75% of the publishers on the planet talking about their support for Natal, which is great. Obviously we have an ego in first party, and we think our first party content leads the way; but great support from third party is going to be important to Natal's success. For the top five Japanese publishers, among other Japanese publishers, as well as the great worldwide publishing support we're seeing, is a great sign for both us and the consumer.

From a first-party perspective, how does it impact you?

PS: Well, because you're Gamasutra, I'll go down more of how I think it really impacts the creative process. There's this mapping that we almost instinctively do now when we play or create games between what we want to happen on-screen and what people will do with the controller to make that happen that, honestly, is completely unnatural. There's nothing else you do in your life that has all of these buttons and triggers -- alright, maybe you fly a 747 or something -- but for the common person, your life is much more direct.

In the creative process now, when you think about the kind of games that are going to get created, it's really about that direct interaction with what's going on on-screen. You can talk to something on-screen, and it knows where you are in the room; and it will turn, if it's humanoid, look at you, and respond. That's not a game genre; that's not E-rated only. This is something that's going to be pervasive across all our games. It's really going to be entertainment for everybody.

So it's about a fundamental new way of interactivity, rather than about enhancing or changing current games, in your view.

PS: Yeah. I was listening to Kojima-san at the creators' panel, and he talked a little about the Metal Gear Solid fan and not wanting to abandon the fan base that he has. I think you'll see some franchises look at facial recognition, voice recognition, and full skeletal mapping and kind of decide what's the right experience for how they're trying to entertain people.

The word I would use to describe a traditional controller is abstract.

PS: Yeah, absolutely.

And I think there are a lot of people who enjoy abstract experiences.

PS: You say enjoy; you mean enjoy or tolerate?

Enjoy! I think there's something enjoyable about something abstract. Not every interaction that we have is direct, as humans.

PS: Well, okay. Interaction with the controller isn't direct. There's nothing about hitting A that has any real-world consequence; you don't run around hitting A or yelling "A!"

This has been one of the parts of the creative process that's been -- I'll say -- a kind of revolution. At first, when people are handed the technology, they think about what the abstraction -- to use your term; I might use a more negative term -- how that should map into physical space: literally something as ridiculous as somebody going like this [Spencer makes an X with his arms] for X, like, is that the way we should hit the X button?

And maybe it works for tens of millions -- hundreds of millions -- of people on the globe; there's nothing wrong with that. I play games every day. But we also know that, in order to grow the size of the gaming community, that abstraction is a barrier to some people. If we can remove that and actually think about -- maybe it comes across as a marketing term, but it actually works in the creative process -- the only experience you need is life experience. If you were going to respond to something on-screen, what would you do in real life? Then think about that as part of Natal. It's been a really useful way of thinking about how to build those experiences.

Part of me is skeptical that that's achievable, actually.

PS: Good! Yeah, the skepticism is something that I actually want. I see technologies that are out in the market today, or things that people are talking about -- different kinds of abstractions. For me as somebody who says, "Well, has this really changed the interaction between me and what's going on on-screen?" you'd say "no". It's lowered some barriers, and great for that.

But the skepticism as we push... People should have been skeptical about first-person shooters on consoles. After GoldenEye, it was a long time before somebody came out with something like Halo. Live -- are console players going to want to play with each other? Let's be skeptical. Avatars -- let's be skeptical of whether Xbox customers want to create avatars. I think skepticism is a healthy hurdle for us in the creative process.

Developing games is already an absolutely complicated, challenging process for people, and thinking in new ways, and having to develop new technological solutions -- things like face recognition, voice recognition, word recognition, all of that potential that Natal opens up -- how do you support developers with that?

PS: (laughs) The way I would challenge you back is to say that the game developers have wanted to know what you're saying for years; they just had no way of doing that. We introduced the Xbox Live headset, and certain games made use of that; but even that, for a kind of room environment, people said that's not quite smooth enough.

When you add technology -- I'm going to use Live because for us it's probably the best case study. Do Live racing games make sense? Well, not all racing games were Live-enabled when Live came out. Now, if you talked about a racing game that didn't support multiplayer online, that's half the game.

I think you'll see this as an additive part of both the creative and game experience in a way that will change what you expect from the games that you buy just like Live does today. If a first person shooter doesn't have capture the flag, it's not a full game. I think the addition of Live technology didn't make the process more complicated; it actually allowed the community to create content on their own just from the interactions that they have.

I think that's debatable; it depends on the case. When you look at games that are shipping a separate executable by a separate developer to support robust multiplayer, that's certainly a complication.

PS: It's a production complication, but when you think about the interaction that gamers have online and the content that we have to create either on disc or through download prior to them shipping, people can augment the experience through the friends that they create and the stories that they get to tell: "Hey, remember that time when we were playing Crackdown and we took down Shaolin at the end together in co-op?" That's content that you and I have created; Dave Jones and Realtime Worlds didn't create that. They created the framework to allowed us to do that. I think that that canvas is strong. When you think about Live and you think about Natal and some of the experiences that can come out of that, I'm an optimist.

Moving away from specifically Natal, what's Microsoft's first-party strategy now for software? We've seen it continue from Xbox through Xbox 360, and as time goes on, the strategy continues to evolve. What do you want to see out of first-party software, and how much first-party software do you want to release?

PS: I'm going to start with "how much," because that's not something that I actually goal the organization on. We don't have a number of releases a year as a goal; we don't have a certain revenue target that we have to hit every year because we understand that our job is to highlight the unique experiences on our platform, and my job as head of Worldwide Studios is to make sure that every game that we greenlight and that we put into production and that we finally ship has a reason to exist in our portfolio. When a gamer buys a game, that doesn't mean they're going to love every game that we ship, but at least they can understand why it fits in.

1 vs 100

Why is something like 1 vs 100 an important part of our ecosystem growth? Well, we take tens of thousands of people on gamespeak on one shard and allow them to play a game at one time; we're actually giving away monetary prizes. That's kind of cool! It doesn't mean it's for everybody, but it's that kind of innovation.

We have Joyride coming out this winter, which is going to allow Gold subscribers to play a free racing game and then a microtransaction backend to the game; I'm curious to see how those kinds of new experiences evolve. So for us in first-party let's stay at the forefront of what gaming is about, and also let's push and work with our platform team to make sure that the experiences that we ship are mapped and have impact on how those platforms evolve.

That's why somebody like [creative director] Kudo [Tsunoda] at the beginning of Natal is so important.

Taking him as an experience lead, as the creative director for us on the content side, and partnering him with the hardware group and platform groups, you're going to build the censor. Here's the kind of experiences we want to build; let's make sure there's a nice push and pull. Classic example is Halo 2 and Live; those two things shipped together, and I think each made each other better.

In this era of PS3 and Xbox 360 games, where third-parties are almost never shipping console exclusives, certainly Sony's been very strong on, well, "our strategy, then, for differentiation is to use our first-party organization to make solid, important, AAA exclusives." Is that how you see it, too?

PS: Absolutely. And to ship them! That's an important part of our strategy. Look at Forza shipping next month: the definitive racing sim this generation. You could say it's the only racing sim that's shipping this generation.

We understand that the experiences we bring to market are most likely the only platform-exclusive experiences that we bring, and that's why it's important that our quality remains so high. If you look at the last three or four years, our review score average rivals anybody out there, first-party or third-party. We continue to bring a great mix of new IP as well as existing franchises and broaden out as a platform into things like movies and social networks and other kinds of entertainment to continue to evolve with our customers as they start to entertain themselves in different ways as well.

Netflix was a big win for us. Was that a first-party game? Well, it's a first-party implementation when you think about it: something that was platform-exclusive, something that millions of people adopted, and something that I think really mattered for the 360 customers. They saw this as definitely a value-add. Twitter and Facebook when it comes this fall; 1080p cinema-quality streaming movies -- these are all additions to what is capable on the platform that continue to change the face and the offerings that customers have.

So are things like Netflix, Twitter, and Facebook under your purview?

PS: Some of the stuff is a mix. Say, like avatars; avatars were created at Rare, and they continue to maintain and evolve the platform there. The work specifically on Netflix and Sky was done in the Live organization. But the link between Marc Whitten, the gentleman that runs live, and what we do in first-part content is really strong; we sit together on a weekly basis, go over the different content that we're building, and make sure that the partnership is there.

To go back to what you were talking about with microtransactions, you're doing your first experiment with those; is that to see how it works with your audience, or is actually expected to become a revenue stream for you either on that title, or moving forward?

PS: Well, to be honest about it, our first introduction maybe was the avatar marketplace that shipped just not too long ago. With the amount of marketplace content I see in my friends list via their avatars, it seems like a lot of people are choosing to customize their avatar in interesting ways.

Is it going to be an interesting part of our revenue streams going forward? If it makes sense to the customers, it will be; if it doesn't, it won't be. So we need to build the right game where a customer feels like they get the right value, they're having fun, and it's an additive part of the experience.

1 vs 100 is something that we did. It's not microtransaction, but it's a free-to-play game that's clearly ad-sponsored; if you play the game, you see that where we're giving away prizes. We've had great adoption there. But it will be an interesting part of our overall revenue stream if we get the games right, and if we don't then nobody will use it.

Do you think it could be something that you'll want to enable for third parties? I don't know if you can speak to that. There was some discussion that Nexon had about whether it might port Mabinogi to the Xbox 360. That's a free game with microtransaction support. It's definitely becoming prevalent on the PC side, and it's becoming a really important business model.

PS: Yeah, I think it's great to see the innovation with FarmVille and other things happening in the Windows space; I think there is learning for us on console there. But as well, we have Games for Windows Live, and we are probably more focused on that marketplace in Windows right now -- maybe not as publicly yet, but internally we look at the size and the types of the communities that are getting created in these different Windows social environments that we think map very well to what we're about and the experiences that we've had on console. It's something that I'll just say we're very active in internally, thinking about the right experiences that make sense on both platforms.

And you're right; there's a new set of publishers out there and a new set of content that customers are really gravitating towards. The numbers that Mafia Wars and some of these other games grab are really outstanding; great success for those teams.

There are entirely new customers that could be enabled, potentially.

PS: Yeah, and when you see the research it's not always a new customer; sometimes it's a dual customer. What I like to see, though, is the timed engagement that those games offer, the nature of the social and community that really gets created, and the business models and watching the innovation there. That's why we do things like 1 vs 100 and Joyride and other work; we want to continue to evolve in that space as well.

Everything's not about a $60 retail transaction; XBLA shows that. Summer of Arcade was hugely successful at different pricepoints; you had Shadow Complex, you had Splosion Man, you had Trials HD -- those are my first-party games, really did really well. Entertainment across multiple prices is important.

If you look at the performance of XBLA games like Shadow Complex and Trials HD, they're phenomenal, actually. It's been very popular, but I feel like maybe now is when XBLA has really arrived as an entity where you can have a launch that big -- it seems like now is the time. Do you think you're reaching critical mass there?

PS: Well, the numbers seem to show that. We had Epic coming with Shadow Complex; obviously a great partner for us in the retail space with Gears, and they looked at Shadow Complex as something they wanted to do Live, and they had great success there.

When you do promotion around Summer of Arcade, when you have tens of millions of people on Live and it goes globally, team sizes are a little bit small, and you can incubate and ship more quickly. I do think it's a really important part of the ecosystem, especially between big retail releases for publishers; it helps even out revenue streams for those publishers, which is nice to see. And in summer, which hasn't always been a hotbed of retail activity, you have something like Summer of Arcade doing the numbers that it's doing; it's good for customers, and it's good for us.

Halo: ODST just shipped, and you have Reach next year. Is there such a thing as too much Halo?

PS: I think there's too much of anything at some point. It's about the quality of what you're shipping. It's great to see the adoption, the customer reaction to ODST; Firefight mode seems to be going over really well, and the new way of telling the Halo story, not in the traditional full start-at-the-beginning, end-at-the-end, really something that's more vignette based -- the customers seem to be reacting well to that.

We need to make sure when we ship any of our games -- specifically Halo, because it's so important -- that the game has a reason to exist, is there to push something creatively, and when it comes to market delivers that in a top quality way; I think ODST did that.

Halo 3: ODST

Reach? We're actually playing through Reach right now, which is great for us this early in the process and for somebody that's been involved in really all of the Halos, something that has the markings of a hallmark release for us, which will be great. But I'll knock on wood on that; we're not done yet.

You have been ramping up your internal studio at MGS, bringing in people like Ryan Payton and Corinne Yu to lead some development. What is going on there right now?

PS: 343 Industries is the studio that we have internally, led by Bonnie Ross, who is one of our longstanding studio managers inside of Microsoft Game Studios, and the amount of creative talent that has come together -- you talked about Ryan, Corinne, Kenneth Scott coming in... There's just a great lineup of people that are very excited about the future of Halo and really the different ways for us telling stories.

Josh Holmes is focusing on Waypoint right now; Waypoint is a new addition to the Xbox experience for Halo customers, something that's sticky between releases. That team, in conjunction with Bungie, is continue to move the state of the art in telling Halo stories. Legends is, I think, an example of the work that they are doing, as well.

With Reach coming next fall, and who knows what 343 is up to, it does make me think -- along with things like economic conditions, the introduction of Natal -- about the lifespan of the 360. Do you have any thoughts on how long we can expect the 360 to be vibrant?

PS: When we started 360, we made a bet on some core hardware technology that we thought could evolve with us. We know that software is pretty core to what Microsoft is about and what we are about inside of the interactive entertainment business, and we launched the New Xbox Experience last fall, completely rewrote the operating system, and I think brought a new set of services and experiences to customers. People really enjoyed that.

Now we're talking about Project Natal, which is fully compatible with all 360s that shipped to-date and adds to the value that people think that they've invested in when they've purchased a console already or this holiday. We think there's a lot of room left in the 360 -- a lot of areas for us to continue to innovate -- and it's not about trying to sell them a new console because we need to; it's about bringing the experiences to light that we think will delight people.

If we run out of headroom at some point, then maybe there's something in the future; we think with the additions of NXE and Natal that we're in a really good space. Live also gives us a channel to obviously continue to bring new content to the platform where it's not just about the hardware capability that you have under your TV; it's about the breadth of services and experiences on Live, and I think today that's been a strength of ours.

We can look at the landscape right now of what's out and what's coming that we know about; Natal's still out there, ODST just shipped, Reach is coming, you just had a great summer, Forza... but what do you think you're going to be talking about a year from now? As much as you can say, where do you think you're going to be at the next Tokyo Game Show?

PS: That's a good question! I was here at the last Tokyo Game Show; we weren't sure how Project Natal was going to come along -- whether we were going to be talking about it at all. I feel like we're in a great position: we've got the best exclusive content this holiday; we're at the right consumer price points; we continue to evolve with new IP and existing franchises; Natal continues to excite both the consumers as well as the publishing community...

I think that next year at this time, the lineup that we're going to have of content and services on our platform at the price points we're at is really going to be a high point in terms of previous generations, something that people haven't seen before in consoles. We showed some things at last E3 around social services: Sky, Canal, other things coming... It's just a continually evolving platform that is a great canvas for content creators.

Prior to the introduction of Natal, there were some moves into doing more family- or casual-oriented things like Scene It? or Viva Piñata. Were you happy with how things went on those titles, and did you find the audience that you were looking for?

PS: There's always positives and negatives to any game that you ship. This has all been kind of a rolling thunder for us. The avatar work that you see in the dash actually came out of some games that we were building at Rare, and what we said was really this whole idea of personalization and customization should be part of the dash -- part of somebody's persona on 360 -- and we were able to move that technology directly into the dash, and now it's not part of any individual game but part of a lot of experiences, even things like Guitar Hero, which I think is great to see.

So any individual release has ups and downs; I think that's true. But the trajectory that we've been on, which continues with the introduction of Natal -- I feel really good about the entertainment that we're bringing to market for everybody.

Viva Piñata: Trouble in Paradise

Has Rare been able to live up to its potential and really deliver on the platform and become an integral part of the MGS studio structure up until now?

PS: One of the things about Rare is they grew up in a very different way than Microsoft did. We didn't have the opportunity to work with them like we did with, say, Lionhead or BigPark prior to the acquisitions, which just creates more learning for both organizations. I really think we're at a point now with both the evolution of our platform and the evolution of Rare where we're going to see the best of that studio.

I think avatars last fall are an example of that; I think the games that they're working on right now are state-of-the-art in the industry. We've kind of reached this positive collision of the trajectory of the 360 and the skill and expertise and passion of Rare, something that will both accentuate one another. I think George Andreas said in the press a month ago, one of our creative directors at Rare, that they really feel now that the 360's at a point where it really maps to what Rare is about; I think that is definitely true.