XTREME XPECTATIONS: XBOX

THE BIGGEST EARTHQUAKE TO HIT SEATTLE IN HALF a century crashes through the Microsoft conference room, jarring the real world like a smash-’em-up video game. Ceiling tiles rattle angrily over the heads of the businessmen frozen around a polished oak table. Fluorescent lights, dangling by slender wires, swing wildly. Walls sway like computer programmers exhausted after a 72-hour coding binge.

Video-game developer Trip Hawkins, an industry legend and veteran of Silicon Valley earthquakes, drops to his knees and makes it under the table with an old hand’s ease. The man he has come to see slouches in his chair and grimaces at the ceiling, annoyed that his meeting has been disrupted.

Damn, damn, damn. James “J” Allard, general manager of Microsoft’s Xbox project, has no time for distractions as his company touts its estimated $10-billion bid to control the digital entertainment industry. Not from the Department of Justice. Not from a limping stock market. And certainly not from God.

Allard ducks under the table and maneuvers close to Hawkins, whose software company could be a powerful ally in Microsoft’s transformation into an entertainment behemoth.

As the Juan de Fuca plate shakes Microsoft’s offices, Allard leans forward on his elbows and grasps Hawkins’ hands. “So, what do you think of our plan?” he asks, grinning. “Think we can kick Sony’s ass?”

*

THE HALCYON DAYS OF THE PERSONAL COMPUTER ARE over, and Bill Gates knows it. Poised to take the PC’s place is an array of digital machines and toys that talk to one another. Wristwatches that read e-mail. Cell phones that check the temperature of your hot tub. Video-game machines that turn the TV into a virtual garden of electronic delights.

This is the age of networks, where connection--to information, to profits, to people worldwide hungry for instant fun--is the driving force of innovation.

All of this is within Microsoft’s grasp because of the Xbox. More than just a video-game machine, it is a Trojan horse designed to carry Microsoft’s shock troops of entertainment into the living rooms of middle America and the world.

The Xbox, and rivals such as the Sony PlayStation 2 and Nintendo’s upcoming GameCube, promise to be all-in-one entertainment centers. You may use them to watch DVD movies. You can turn them into high-tech stereos, playing music CDs and digital MP3 tunes. Someday you will wield a joystick and surf the Internet from a TV connected to such a box. Along the way--by charging a fee to download the hottest game, for example, or providing the digital backbone so that the Xbox will talk to both the Internet and your cell phone--Microsoft will be there, racking up the profits.

But today’s focus--for Gates, for the Xbox 1,000-person team, for Microsoft’s ultimate survival--is on games. Cool games. Kids adore games. College students gobble them up. Yuppies buy them for hipster cachet and the bragging rights that go along with owning the latest, sexiest gadget. Microsoft is betting that the technology in the Xbox--the brute force and all the music, movies and Internet fun the device could handle--will ultimately capture everyone else.

Striking into this new market, Microsoft plans to grab the public by its throat this week at E3, the world’s largest digital entertainment trade show. Here, at the Los Angeles Convention Center, the company will unveil a wide range of games it hopes will catapult the Xbox into the must-have gift on everyone’s holiday shopping list this fall. And Allard and his caffeine-chugging, T-shirt-wearing, thumbs-sore-from-punching-the-joystick team will blast their message to the masses.

Microsoft is here. And it’s not playing around.

“We’re either going to make the biggest crater on the planet, or we’re going to get into entertainment big time,” Allard says. “It’s all or nothing.”

It is an epochal shift for a company that built its $300-billion-plus empire out of the numbingly boring piece of software known as the operating system, those Windows programs that define what your computer can do. After all, Microsoft bet heavily in the past on other emerging markets and in the early ‘80s even tried to make a home PC that hooked up to a TV--only to fail. Now the company must make a Herculean wager the likes of which is rarely seen in these declining economic times.

Xbox has the money: The company is expected to spend an estimated $10 billion over five years just manufacturing the box itself (yes, that is greater than the gross national product of Bulgaria). In addition, Microsoft has set aside a half-billion dollars for advertising and marketing--for the first 18 months.

Microsoft is deadly serious about conquering a $20-billion global industry, one that pulled in $6 billion in software sales in the United States last year. And it’s evidence that the old-school Microsoft, known for its corporate hubris and predatory streak, still lives in the Xbox world. The company hasn’t completely abandoned its business philosophy: If you spend enough and are determined to win no matter what the cost, you can crush anyone--Sony, Nintendo, even Hollywood.

Still, there are some things even Microsoft cannot control.

The earthquake continues to rumble at company headquarters, killing the power and cutting off phone service. Throughout the Xbox building, secretaries and vice presidents alike shriek in fear--a reaction that Microsoft’s competitors rarely hear, and most would happily give their firstborn to witness.

Hawkins stares at Allard, the anointed “minister of soul” for the Xbox project. “I like your plan,” Hawkins says, as the two men remain crouched under the table. “Maybe [God] doesn’t?”

*

TO UNDERSTAND ALL THE STURM UND DRANG OF THE XBOX PROJECT, consider the institutional culture of Microsoft. Within the company’s sprawling Redmond, Wash., campus, workers flock to cream-and-beige buildings with mirrored glass windows. Peer inside, at the narrow, maze-like hallway where Microsoft’s art committee is currently showing its latest collection, “Figures and Landscapes.” This is a world where curators are described as “user interface designers,” and “feisty” works include 1688 engravings of celestial charts.

Microsoft “isn’t always fully connected to the outside world,” says Alex St. John, a former Microsoft executive and current chief executive of the software firm WildTangent. “It takes a while for them to understand an idea or recognize a serious threat.”

Back in the early 1990s, Microsoft was facing two challenges. The first was the Internet. The second was Sony. The consumer electronics giant had just released PlayStation, a game machine that would eventually sell more than 80 million units worldwide. With an audience that enormous, Sony understood this machine--and not the personal computer--could become the brain of the high-tech home. As the first-generation PlayStations were flying off the retail shelves in 1996, Ken Kutaragi, the Sony executive who spearheaded the game device, called together a few dozen engineers from all over the world to a secret meeting in the city of Ito.

There Kutaragi divulged his dream of turning PlayStation into a platform for connecting people to each other, and to an increasingly wired world.

“We always felt the real enemy was Japan, and specifically Sony,” says Jason Robar, a former Microsoft executive who worked on an early version of the technology that became the Xbox. “We just couldn’t convince Bill that we were right.”

Why should Gates believe it? Such proposals clashed with Microsoft’s corporate culture, where the very idea of shifting the public’s focus away from the PC, and all the software that Microsoft provided, was heresy. Building a tiny, powerful game machine--a toy, for heaven’s sake--that could steal away potential computer buyers was insanity.

Besides, the company was still smarting from the “MSX” fiasco, an ill-conceived partnership in the early ‘80s with more than a dozen Japanese consumer-electronics companies, including Sony, to develop a home-entertainment computer. The device, plagued with technical problems, eventually died.

But by the late ‘90s there were subtle signs that the good times would end for the PC. People weren’t buying as many new machines because they couldn’t justify spending $1,300 on a new PC every 18 months just to have a bigger, stronger box. A slowdown in sales meant fewer sales of Microsoft software.

The company had to change, but it still winced at a string of consumer electronic flops. The Microsoft Phone, a wireless device that allowed people to check their caller ID on a PC screen, went nowhere. Neither did WebTV, which promised an easy way for grandparents and Luddites to use e-mail and surf the Web.

Then, Sony forced Microsoft’s hand. PlayStation 2, says Robar, “got everyone’s attention in Redmond.”

The PlayStation 2 is, in essence, a computer for the living room--and it doesn’t use Microsoft software. When Gates learned that Sony had followed up PlayStation with a sequel, he finally grasped the danger. Looking to fight back, Gates scrambled for a solution. At an annual brainstorming session in March 1999, he wandered over to a small crew talking about video games.

“Sony is a threat. What are we going to do about it?”

Gates did what all bureaucrats do: He ordered a task force to come up with a solution. What he didn’t know was that, at the time, Microsoft employees had developed at least four different proposals for building Xbox-like products. One suggested the company should clone Sony’s PlayStation. Another offered to build an all-in-one computer server that would cost as much as $800 each.

Playing guerrilla corporate politics, a renegade team of Microsoft employees--Kevin Bachus, Seamus Blackley, Ted Hase and Otto Berkes--burst into the task force’s first meeting and slapped down their plan. Let a computer or consumer electronics company, such as Dell Computer Corp. or Panasonic, build the Xbox. Microsoft could make the hot, hip games, as well as license the software that would actually run the device.

It seemed to make perfect sense. Microsoft could exploit the huge economies of scale of the PC industry, using the same hardware components as an IBM or a Dell. Microsoft’s DirectX, the widely embraced software “language” a game uses to talk to a PC, could become the software spine. This strategy would also make it easier for software makers to make games for the new machines, because they would be using familiar tools and technology.

There was only one problem: None of the computer makers wanted to jump into the game business with Microsoft. Why bother? There’s no money to be made in the box itself, and companies such as Dell and Toshiba wouldn’t profit from the software.

(While Sony has lost millions of dollars selling its hardware, those losses have shrunk over time. The cost of making a video-game machine decreases as the volume of units goes up and the costs of making the box drop. Sony has recouped its losses, and then some, by selling and licensing the games that run on the device.)

In addition to a lack of profits, computer companies had another reason to avoid the Xbox: “They also wanted far too much evangelism on our part to promote the thing,” says Michael Dell, chief executive of Dell Corp.

By late 1999, it was clear that Microsoft, the software maker, would have to become Microsoft, the hardware manufacturer.

*

AS THE XBOX PLAN BEGAN to evolve, contentious debates about the project exploded all over Microsoft; the biggest of those was over what would go in the box. The Xbox team insisted its product must rise above the pack. Having the fastest processor, the best graphics and a means of connecting to the Net went without saying.

A key element was adding a 10-gigabyte computer disk-drive, an enormous electronic storage vat. In the past, video-game machines didn’t have many ways to store data, therefore losing subtle artistic techniques such as story-line continuity.

None of the Japanese boxes--by Sony, Sega (which discontinued its Dreamcast earlier this year) or Nintendo--had such disk-drives. Microsoft would. But it meant adding to the Xbox’s multibillion-dollar development costs. To say nothing of the expensive engineering salaries, the marketing fees, the man-hours that could have been spent on other projects, and the fact that Flextronics--the second-largest contract manufacturing company in the world--is building the Xbox for Microsoft, picking up thousands of workers and building several plants, one in a small town in Hungary.

Just think about this: If the Xbox sells for $299--the magic price point that no console maker dares exceed--Microsoft will lose as much as $100 on each box, according to company sources and research by financial analysts at Merrill Lynch. Even several years from now, when the price of most of the components inside the Xbox drops, it will still cost Microsoft about $200 to make the machine because the price of the disk-drive is likely to stay steady. Now, take into account that Microsoft expects to ship up to 50 million Xboxes over the next five years.

Considering what is at stake, remaining constantly optimistic has become difficult for some of the Xbox team. Particularly when many people--from rivals to industry analysts to even Microsoft’s own partners--question Microsoft’s long-term commitment.

“Six months before [the Xbox team] was here, I had the WebTV guys telling me that they were the future. Now, WebTV is dead,” says John Riccitiello, president of Electronic Arts, the world’s largest independent game publisher. “There is nothing that prevents Bill Gates from walking into a board meeting three years from now and saying, ‘We’ve lost how much? That’s it. Xbox is dead.’ ”

*

MICROSOFT MAY BE A VIDEO-GAME virgin, but it understands a fundamental truth: Software sells hardware. The Xbox games must convince a legion of consumers that Microsoft is not an evil corporate empire and prove to its entrenched entertainment rivals that the company is relevant.

So Microsoft needs the “killer” application--bigger, better, harder, hotter, flashier, sexier than anything Sony could dream up--that will persuade consumers to spend up to $300 on a video-game machine. If the games are a hit, say industry experts, the potential market is enormous: at least 70 million U.S. households will own a video-game machine by 2005.

Finding or creating hit games, though, is a daunting task. To most people, video games are nothing more than trivial toys for young boys. They are filled with mindless violence between cartoon characters that have all the emotional depth of Scooby-Doo.

But within the world of game designers, games are art. There is an intangible quality that separates the merely silly from the awesome, those games that will sell millions of copies and envelop a generation in digital memories. Myst is art. So is the Final Fantasy series, where millions of fans have been entranced by epic battles that hark back to the myths told by Homer.

“What makes a good game?” You might as well ask, “What makes a good painting. What makes a poem great?” Whatever the answer is, the entire Xbox team is painfully aware that the Japanese have it. It’s no surprise. They defined it.

For more than two decades, Japanese game companies such as Nintendo and Sega have created or published an endless series of hits. Designers such as Nintendo’s Shigeru Miyamoto, the man behind Mario and more than 70 game titles that have brought the company billions of dollars in sales, are treated like rock gods. Their works are studied by fans and college students with the same intensity as those by Monet or Picasso.

For Microsoft to win at this game, it must persuade Japanese software developers to make games for the Xbox. Thus far, more than 200 game makers worldwide have signed up to do so. In the United States and Europe, the list includes a literal Who’s Who of the video-game world.

The Japanese, however, are more cautious. They carry the scars from billion-dollar mistakes, of delving into the collective psyche of the joystick generation and knowing what makes it twitch. They have built games for more than two decades. After hearing Microsoft’s pitch, a scant few--Sega and Konami Corp., among them--have backed Xbox. For most, their attitude in public is polite and noncommittal.

These gaijin companies have tried so hard, for so long, to capture the essence of what makes a collection of dancing pixels into a cool art form. They come. They try. They go. We’ll deal with them and make a game or two.

In March, Bill Gates personally went to Japan to court the Japanese developers. He arrived amid fanfare, a big and booming vision of the future. The public yawned. The day after Gates spoke, shoppers crowded into Japan’s Akihabara “electric town” district, ignoring the rain and waiting to play the latest Sony PlayStation 2 games.

Sony is local. Microsoft isn’t.

“I don’t really have a good impression of Microsoft’s corporate style,” says Yosuke Kinbara, 24, a recent university graduate and avid game-player. “They buy up everything. Among my friends, the Xbox doesn’t even come up in conversation.”

Perhaps, though, there is hope: On the same day, kids in the outskirts of Tokyo are sporting T-shirts and bags with Xbox logos.

*

TO SUCCEED IN THIS world, video-game console manufacturers must grab the hearts and wallets of the hard-core game fan: males in their teens or 20s, the guys who create a buzz over a new electronic gadget.

“They can spot when someone’s trying too hard,” says Cliff Bleszinski, a game designer with leading software company Epic Games. “It’s like when the older uncle is trying to be cool with the kiddies. It’s orchestrated. It’s not real. Cool kids can sniff this stuff out instantly.”

For the Xbox team, housed in a trio of mirrored buildings miles away from Microsoft’s insular corporate headquarters, image is everything as well. They work in a cacophony of sound and pastiche of color, heavy on the avocado. It’s the Xbox palette and is reflected in the executive conference room, the staff’s high-end hipster wardrobe, even the occasional tint of the thinning hair on Allard.

“We’ve learned, we’ve listened and we get games,” Allard says. “We are the Eminem of Microsoft.”

But are they? Are they hip enough?

On a chilly night on Seattle’s waterfront, Microsoft is trying to get down and dirty. The company has turned the Experience Music Project into a pleasure dome for the world’s video-game press, in hopes of wooing their approval for the Xbox. The young men, proudly displaying laminated plastic badges with the words “all access pass,” march into a vast hall at the rock ‘n’ roll museum.

Techno-music throbs. Testosterone rages as the pressmen hungrily eye the only available women: Microsoft’s perky, fuzzy-sweater-wearing publicists, modern Hebes bearing cups.

Before the second round of drinks are poured, Microsoft’s maidens hustle the multitude into a smaller room, where the main attraction of the evening isn’t sex or drugs or even rock ‘n’ roll.

The highlight is a game of geek Trivial Pursuit. For much of the evening, a quizmaster fires off questions about classic video games. “Name the live-action football game for the PC and Saturn in which players only played offense.”

Uh, what? Who cares? Where are the women? What happened to the music?

The audience mills about, drunk and confused. Those who try to leave are politely ushered back into the quiz room.

“These people need to get a life,” mutters Lorne Lanning, a former Hollywood visual-effects supervisor who now runs a San Luis Obispo game company, Oddworld Inhabitants. “Why are they doing this?”

Allard has no clue, either. His job description includes infusing Xbox--and its team--with a hip sensibility. He was, after all, among the first people at Microsoft to get a company e-mail address, for heaven’s sake. He understands cool.

He did not throw this party. “We will never, ever, ever do that again,” Allard says through gritted teeth. “Never.”

A few weeks later in San Jose, the Xbox boys--minus Allard--have flocked to the 20th-floor luxury suite at the tony Fairmont Hotel. They are VIPs at an elite party for the video-game world.

Trade press mingle with Sony and Microsoft’s Xbox executives, who sit on the floor and share a pipe filled with marijuana. Candlelight casts a soft glow to the sweet smoke hovering above their heads. Nearby, a girl in a skimpy slip-dress sprawls across the living room couch, a glass tumbler slipping from her drunken grasp.

A knock at the door around 2 a.m. It’s hotel security.

“You. You. And you,” says the party host, as he taps several reporters on the back. “Get out. Now.”

By the fifth knock, everyone is gone except top players from PlayStation2 and Xbox.

Hours pass. Sony’s people finally stumble back to their rooms.

The Microsoft executives are the only ones left standing.

*

Times staff writer Mark Magnier contributed to this story.