If you’re like me, you have an emotional attachment to your game consoles. I played Pong clones with my brother on the old Intellivision system in the earliest days of gaming. I associate my memories of playing games with the milestones of my life. So when Microsoft decided to end the life of the original Xbox after just four years on the market, I felt some pangs of grief.

I realize how ridiculous that sounds. It’s just a black box remembered not-sofondly as the Hummer of videogame machines. But I covered the birth and life cycle of Microsoft’s first videogame console from the outset. I recall making a call to Seamus Blackley, an Xbox co-creator, who had to play dumb about the rumor that Microsoft was making an Xbox. At the time of the call, he was looking at a prototype on his desk. He got a big laugh about that when he told me later on. His dream — which became Microsoft’s — was to elevate games.

Kevin Bachus, co-creator of the Xbox and ex-CEO of game publisher Nival Interactive, recalls how expectations were so low that the console was nicknamed “port box” and that everyone expected to see the “blue screen of death” — even inside Microsoft. Microsoft had scant credibility, and the credibility for the videogame business in the mass media was also pretty low.

I remember how Ed Fries, then the chief of Microsoft Game Studios, took the stage at the GameStock conference in spring 2001 and talked about how “we are finally ready to leave the cartoon world behind.” He said the competition with Sony and Nintendo was an “epic battle,” and that games were more than about “killing time.”

“If we take that seriously,” Fries said under the spotlight of the darkly lit stage, “if we focus on making art, not just entertainment, then I think for the first time we’ll deserve to speak to the mass audience and inherit our rightful place as the future of all entertainment.”

Sell Consoles, Lose Money
The Xbox spread hope through a game industry that didn’t want to be dependent on the incumbents. More than 800 games were built for it. Some, like Blood Wake and Azurik, were entirely forgettable. Flame wars reached a new level of frenzy as fans of Halo debated how it kicked the ass of any PlayStation 2 game. Xbox Live launched without a killer application, but by the time Halo 2 debuted in fall 2004, Microsoft’s online gaming service had left the others behind.

Microsoft met its goal of becoming a “thought leader.” Thanks to Halo, the Xbox became a cultural phenomenon, selling more than 24 million hardware units. Sony has sold more than 115 million PlayStation 2s — many of them after the launch of the PS3. Surely Microsoft gave up a ton of potential sales by prematurely shelving the Xbox, right?

Yet, I understand from a business point of view why Microsoft decided to stop making the Xbox. Even at the end, the company was still losing money on every box. The Xbox succeeded on many fronts: grabbing the No. 2 spot in marketshare by edging out Nintendo; establishing a cool gaming brand for Microsoft; pioneering online gaming on consoles; and establishing hit console franchises such as Halo. But it was an utter financial failure, with the losses over four years hitting an estimated $3.7 billion, according to insider sources.

When the machine first came out, Microsoft was losing more than $100 per console, partly because it put the $50 hard-disk drive into every machine. The parts used were already cost-reduced in the PC, so suppliers couldn’t drive down the cost much lower. Whenever they did, Microsoft’s rivals forced it to cut hardware prices, too.

J Allard, then the head of the Xbox platform, told me in a 2006 interview that Microsoft had planned to engineer “a soft landing of the Xbox business in 2005.” The plan was to keep selling software through 2007, depending on demand. “A soccer mom buying a $129 Xbox in 2005 doesn’t fuel our agenda,” Allard said. “It just costs us money.”

Worse, the more machines Microsoft sold, the deeper the losses got. Microsoft couldn’t dig out of the hole, except for one quarter, when Halo 2 debuted. “We would have liked to keep it going, but we couldn’t do it,” says Shane Kim, the corporate vice president of Microsoft Game Studios.

The End Is Here
In an effort to shave costs, Microsoft closed down its factories in Hungary and Mexico and set up shop in the factory city of Doumen in Southern China. Leslie Leland, who was then director of hardware evaluation, saw the last Xbox machine roll off the Flextronics assembly line in summer 2005. At that point (probably around July), the company had to start converting the line to make Xbox 360 prototypes. “I realized it was the end of an era,” she told me.

Microsoft kept selling the machines for as long as they were in stock. There was no ceremony. There was no sentiment. It was business. The corporate strategy demanded that the money-losing machine be put to rest so that a more cost-efficient box could replace it. But Xbox-game developers had barely begun to make their games. Some, like Bungie, had only two chances to build games for the Xbox. The rapid obsolescence of the technology, in this case, was racing ahead of the ability of game developers to exploit it. Consider the fact that the Xbox is probably just as capable a machine as the Nintendo Wii. “People are barely using the features Xbox had, even today,” says one veteran Xbox insider.

Not pictured desperately trying to get out: Untapped potential.

Looking at Sony’s continuing success with the PS2, you can question the wisdom of the decision. While Microsoft may have lost money on each console, it could have kept selling games to a larger and larger installed base. Sony, for instance, continues to mine its PS2 installed base with the launch of hit games like God of War II for that system, well after PS3 has hit shelves. Surveys back up this strategy: OTX Research found in an April 2007 survey that 26 percent of 1,250 gamers interviewed were still playing games on the Xbox, while only 17 percent were playing on the Xbox 360.

But the Xbox 360 launch took priority. Microsoft wanted its game developers, publishers, and its own internal studios to focus on Xbox 360 games. Microsoft had to do everything it could to boost the Xbox 360. If it didn’t, the console may not have taken off.

Too Young to Die
Original-Xbox fans can take solace in the fact that Microsoft put some of its brightest minds to work on creating backward-compatibility. For Xbox games to work on the Xbox 360, Microsoft had to write software that was specific to each game. Halo 2 represented a huge risk: Microsoft had to get it running on Xbox 360. The problem was that so many people were playing Halo 2 on Xbox Live that the game had much longer legs than any other title. If that game didn’t work on 360, then those players wouldn’t necessarily buy the new model, which would have been disastrous for early demand for the console. Now, hundreds of Xbox games work on the Xbox 360. But making the Xbox 360 backward-compatible doesn’t ease the fact that the Xbox died a premature death.

I don’t want to sound too sentimental and paint a picture of the finance experts as purely bad guys. There is nothing wrong with Microsoft paying attention to the profit motive. The Xbox wasn’t a charity for gamers or game developers. Robbie Bach, the president of Microsoft’s Entertainment and Devices group (which includes the Xbox), told me in a 2006 interview that the surest way to guarantee that the Xbox brand will continue into the future is to make it into a profitable business.

You can imagine the downward spiral that could happen in the absence of profits. If there is no prospect for making money in the near future, it becomes like Ahab’s pursuit of the White Whale — an entirely fruitless venture that the folks on Wall Street would consider madness. And if shareholders revolt, they can bring down the management team at the company and install those who pay more attention to the bottom line.

That’s the irony of Microsoft’s situation. With $28 billion in cash, it can afford to lose money on the Xbox. But if the Xbox never makes money, investors will lose confidence. The investor perception: Microsoft can make a mint with Windows and Office, but pour the money down the drain on the Xbox. That’s a formula for a flat stock price, which leads to devalued stock options. The best employees then leave for startups or rivals such as Google. To deal with such perceptions, Microsoft had to make the Xbox business profitable. The current goal is to be profitable in the fiscal year that ends June 30, 2008. It is attainable in part because Microsoft decided to end the life of the Xbox early.

The good thing, says Kim, is that there’s no need to retire the Xbox 360 early. The system was designed from the beginning so that its costs could be reduced. He says there’s no reason the 360 can’t be sold for a decade if demand exists.

Moving On
The legacy of the original Xbox goes beyond what Microsoft learned so that it could field a better Xbox 360. Nintendo and Sony learned from it as well. Sony has built a first-class developer support group in response to Microsoft’s highquality developer support — a core competency of the veteran software company. You could argue that Nintendo got serious about innovation because Microsoft knocked Nintendo for a loop with the Xbox, stealing second place from a company that had been in the console-game business for decades. “We couldn’t help noticing that Sony and Nintendo suddenly started raising their game,” Bachus says.

The Xbox also created a generation of crusaders. Some of them are still with Microsoft; some have left. It’s been interesting to mark the diaspora of creative talent that left the Xbox team. Sure, top executives such as Robbie Bach, Bill Gates, Steve Ballmer, and Todd Holmdahl are still around. And J Allard, who shepherded the design of the Xbox 360, has since shifted his attention to Microsoft’s Zune media player.

Seamus Blackley was a major force behind the original Xbox.

Others exited entirely. Seamus Blackley and Kevin Bachus, two of the earliest and longesttenured Xbox co-creators, left to start Capital Entertainment Group to make games. After Capital foundered, Blackley went to Creative Artists Agency while Bachus went to the ill-fated Infinium Labs and was recently the CEO at Nival Interactive. Ted Hase, another co-creator, left Microsoft and now lives in Las Vegas. Otto Berkes, the fourth co-creator, is general manager of the Ultra Mobile PC platform at Microsoft. I consider my books Opening the Xbox and The Xbox 360 Uncloaked to be odes to those who built the business for Microsoft. They never really got much credit for all of the work they did.

The Legacy Is You
Likewise, gamers should remember the original Xbox for all of the experiences that it gave them. Years from now, you’ll remember the joy of throwing your first sticky grenade at an Elite in the original Halo. You can still see the look of the sky as you, as Master Chief, gazed up at the sun and Halo’s ring. Those moments will fade as you experience new moments with more fidelity, graphical realism, or audio quality. You may sell your old Xbox on eBay or put it away in the garage, but don’t forget that your games — and gaming in mass culture itself — were elevated to the highest levels because of the original Xbox.

No one likes to look back in our industry. But I think that it’s a great way to remember what we were doing in our lives as we played certain games, who we are, and where we’re going.

Consider it another way. “Xbox isn’t about any one specific box,” says Bachus. “What it should be about — as sappy as this may sound — is a commitment to excellence. Bringing people experiences they can’t get anywhere else, connecting them, enabling creative people to see their visions realized without compromise — just like Xbox itself.”

Dean Takahashi is the author of Opening the Xbox and The Xbox 360 Uncloaked. He is a full-time columnist at the San Jose Mercury News.