Game On!

These are truly exciting times for all of us in the Interactive Entertainment Business.

Fresh off a phenomenal holiday season, we now stand at the forefront of a company-wide vision of Connected Entertainment, articulated just moments ago by Bill Gates and Robbie Bach at this year’s annual Consumer Electronics Show in Las Vegas . It’s a vision to make entertainment more personal, more interactive, and more social, making it easier to connect with communities and share experiences. All delivered through one consistent, simple user experience.

I’d like to update you on several key announcements we made at CES in support of this vision of Connected Entertainment, but first let’s take a moment to reflect back at what we’ve accomplished this holiday and celebrate how far we’ve come.

Where We’ve Been

In little over a year on the market we sold over 10.4 million Xbox 360 consoles in more than 37 countries, exceeding our commitment to pass the 10 million mark by the end of 2006. And in a market environment that saw strong launches by our competitors, Xbox 360 was the top choice this holiday season.

Keeping our commitment to sell 10 million was no small feat, and while we caught more than one industry pundit off guard by exceeding this number, our success comes as no surprise to me. I’ve known all along that within the IEB we have the most innovative, talented people in the industry, who aren’t afraid to take risks, drive innovation, and make big bets.

When we launched Xbox 360 in the Fall of 2005, we bet big on what we saw as three major market forces that would define the next generation of consoles:

· Social Gaming: Last generation, Xbox outpaced all consoles with a 10% internet attach rate. Now, we announced tonight that the Xbox Live community has eclipsed 5 million members, with over half of all consoles connected.

· High Definition: In late 2005 HDTV’s were just entering the consumer mainstream. We met these early adopters with a primary reason to upgrade to HDTV with Xbox 360. Now, 2006 saw more growth in high definition entertainment than any year before, and our launch timing put us at the forefront of this growth.

· Digitally Distributed Content: We bet early on that consumers would demand a device capable of delivering high definition content straight to their living room. Now, over 100 million pieces of standard and high definition content have been downloaded from Xbox Live Marketplace.

By betting big and driving innovation on these market forces, we’ve delivered one of most powerful and complete gaming experiences of the next generation, giving consumers more access and more choice than ever before.

This holiday Xbox 360 owners had more than 160 games to choose from – the strongest first year lineup of games in console history, highlighted by our record-breaking attach rate of 5.3 games sold per console. Leading our lineup was the blockbuster hit Gears of War, which sold more than 2.7 million copies after only 8 weeks on the market and won numerous Game of the Year awards.

I’m especially proud of the continued success of Xbox Live Arcade , with more than 20 million games downloaded to date, including titles like Assault Heroes, Small Arms, DOOM, Street Fighter II, Uno and more. Opening up this new digital distribution channel plays a vital role in broadening the console market, and set an extremely high bar for our competition to match.

With Xbox Live we’ve created an online experience that’s simple, easy and fun, and, with more than 5 million members, it’s well on its way to our stated goal of 6 million Xbox Live members by June 2007. What’s truly special about this growth, however, is the “stickiness” of this service. Once you join Live, you’re hooked. The average Xbox Live Gold subscriber has more than 21 friends, and every day there are 2 million messages (text/voice/picture) sent across the Xbox Live network. These friend connections are key to our growth heading into the future.

Xbox Live also makes it simple to download entertainment content, with more choices available every day from a growing list of partners. Right now, over 70% of Xbox Live members are downloading content from Xbox Live Marketplace.

We’ve come quite a ways since launch, bringing together the right technology with the right content to create an unbeatable customer experience. But as we heard from the keynote earlier tonight, the best is yet to come.

Where We’re Going

There was plenty to get excited about from the stage at CES for both Xbox 360 and Games for Windows.

The launch of Windows Vista marks the most significant event yet in our commitment to revive the Games for Windows brand. With gaming and graphics at its very core, more robust family settings, and games explorer, Vista is undoubtedly the best gaming OS ever made and a clear win for PC gaming enthusiasts and casual players alike.

For Xbox 360, we sold in excess of 10.4 million Xbox 360 consoles in 2006 and remain on track for 13-15 million units shipped by the end of FY07. We demonstrated our ability to turn our thought leadership into market leadership. Now in 2007, our challenge is to use our position as market leader to continue pushing the innovation envelope and connecting consumers ever more tightly to their games, their friends and their lifestyle.

2007 will quite simply be the best year for great games in Xbox history. As Robbie announced earlier this evening, this year we’ll more than double the 160 games available today, with a truly remarkable amount of AAA quality titles to keep gamers engaged throughout the entire year including Lost Planet, Forza Motorsport 2, Crackdown, Mass Effect, Too Human, Shadowrun, Bioshock, Guitar Hero 2, Dance Dance Revolution Universe, Assassin’s Creed, Blue Dragon, Project Gotham Racing IV, Grand Theft Auto IV, and the most anticipated title in gaming history … Halo 3. This incredible slate of titles will keep gamers of all interests racking up achievements throughout the year.

Since the beginning, we’ve said gaming should be a social experience, where community matters and friends are just a blade away. Now, we’re bringing the Xbox Live community to Windows this summer, enabling tens of millions more to join the fun and delivering on the promise made by Bill Gates at last year’s E3. On stage we showed for the first time, through a game of Uno, what the Live experience will be on the PC, and how it enables casual and hardcore gamers alike to connect with their friends regardless of what platform they’re on.

Earlier tonight we also addressed a consumer demand that’s growing louder and more intense every day: people want more high definition content, and they want to choose how it’s delivered. We’re meeting this demand with three ways to get high definition content on Xbox 360.

First, we offer the most affordable HD DVD player on the market that’s selling out at retail. HD DVD is quickly becoming the format of choice for consumers, with an industry-leading projected annualized attach rate of 28 movies per player.

Second, we’re the only gaming console to offer high definition downloadable movie and TV content, rocketing to the #2 internet download service and #1 where it counts - in the living room, and in high definition. With over 1,000 hours of content, we’re posting content as fast as we can “ingest” it into the system, with high definition downloads leading the way. Just recently, COMEDY CENTRAL Senior Vice President Caleb Weinstein announced that “In nearly two months, Xbox Live has become our second highest performing digital distributor.” Now, even more content partners are lining up to get into this service, including new addition Lionsgate will bring an all high definition movie line-up to our rapidly growing digital library.

Third, we’re bringing the next generation of TV to Xbox 360 with IPTV. Shown for the first time running on a Xbox 360 at CES, IPTV unlocks the potential of TV with a much faster, easier and simpler experience. This combination delivers a complete connected entertainment experience as we saw on stage with voice chat and game invites sent and received while watching TV. And with DVR, you can accept an invite and get in a game without ever having to miss your favorite show. With over 16 partners testing or deploying this software in test markets, it won’t be long until this 1-2 combination hits the mainstream.

With so much on tap, I expect us to continue to push the envelope on all fronts in 2007 – games and game development, Xbox Live, entertainment content, and allowing all these choices to connect in meaningful ways.