In Part II of our interview with Elevation Partners co-founder John Riccitiello, he acknowledged the unlikeliness of the Xbox 360 reaching 10 million consumers by the end of 2006, but praised Microsoft for the promotional power of Xbox Live Marketplace and for the casual gamers the Redmond giant has attracted with Xbox Live Arcade. In the final part of our interview, Riccitiello discusses why rumors of the PC game market's death are greatly exaggerated, the promise and peril of Sony's approach to online, and the threat that the free-of-charge PlayStation Network service poses to the future of Xbox Live.

What do you make of the doom and gloom still surrounding the PC game market?

People keep saying that the PC game market is dead. That's just such bull___. The PC game market has just moved to subscriptions. The market has grown by a 25 percent clip over the last four years if you look at the combination of global markets plus subscriptions and packaged goods. It's moved in a different direction. From a publisher's perspective, if a consumer mails you a check every month, that doesn't make those dollars less good than dollars you get from your retailers.

Next year, we've got a couple of the most innovative products in the industry are coming on PC. Including one from my hero, Will Wright. While I look at that and say, Spore, some people may like different aspects of it, but who can imagine using their computer for any form of entertainment and not buy it? I feel like I have to. I guess I'm an optimist in the clouds right now, when everyone else wants to be a little more pessimistic than I am. But it's actually the wrong time to lose nerve in this business.

Earlier, you mentioned the importance of Xbox Live. What do you think the impact on Live will be with Sony coming in with a free online service for PS3, given that Microsoft charges for its service?

If you listen to Sony--and they may be right about this, but I don't know--they want to position this as if it's the mid-to-late 90's, and while Microsoft is marketing a closed-system AOL service, Sony's creating the Internet. You can do anything you want on your own servers, and they'll back you up if you need the help. And at that level, I think that's an awfully cool concept to rival Microsoft; Microsoft having a maybe slightly easier to use, maybe a little bit more stable totally inside the empire network that you can plug into.

Generally speaking, planned marches win early and chaos seems to prevail in the long run when it comes to online businesses. The ones that allow for more democracy of access. It'll be interesting to see how Microsoft reacts to that. They've already got a business model that works for the publishers, which is really important. Frankly, I hate to admit when someone's designed something better than I could, but they've done that. I really like what Microsoft has built and I love some of the stuff they're doing. At the same time, I think it's really cool that Sony's coming at this by saying, "We're going to be an open system in a world of closed systems." But open system can't be a code word for "We don't have anything figured out."

I have mentioned to you before that one of the things that gives me heart is that some of the smartest technologists I know in online--a couple of guys that used to work for EA--are now working for Sony on their online business. I don't know if you've ever met Chris Yates...

No, I haven't.

He's a brilliant, brilliant engineer. Just staggering. He's one of the two guys that delivered Ultima Online for EA. I think he's the lead technologist or something for the Sony online service, and I've never seen him do anything that didn't work. And I know that they've brought some interesting partners in. I just don't have enough visibility to answer your question straight up, other than that I like the idea of the two principal platforms that are targeting teens and young adults, the two guys with the nuclear CPUs, are taking a different strategy. That gives me hope that if they're both successful, the market'll be bigger, and if one is and the other isn't, one will change and follow the other's lead.

Put on your marketing hat for a second. Microsoft's positioning is that Xbox Live is a mature service, the reason that they charge for it is because the feature set offers a good deal of value, that it's something that you can't offer for free. On the flip side, though, what they've done with Xbox 360 is offer two tiers of service: Silver and Gold. With Silver, they're offering for free everything that they're claiming that it will be very hard, if not impossible, for Sony to deliver. They're giving that away for free. The one piece that Sony has proven on both PS2 and PSP they can do --which is online multiplayer--is the upgrade piece that Microsoft has chosen to charge for. Does that make sense from a marketing perspective?

Monetizing traffic on the internet is anything but logical. It obviously started where everyone was supposedly free. Virtually every media company is wrestling with this problem. In a gigantic way. What I understand that Microsoft is doing with Gold and Silver is they're trying to find the line, and they're trying to do it in two dimensions. One dimension being respective of their service, offering more for Gold, offering more personalization, more gameplay features, more user persistence--

Not to cut you off, but literally the only difference between Gold and Silver right now is multiplayer. All of the other--

I understand that.

Okay, sorry.

What I was going to say to your question is, I know the differences now. I don't think that's where it's going. But I do believe that they're responding to the expectation of having to compete with Sony. Otherwise I think they'd have put more differences there between Gold and Silver. There's a lot of things that are currently not in Xbox Live Silver that they're probably going to add to Xbox Live Gold over time. Talking to these guys, they've got a lot of plans.

Honest truth, if I were them right now, I would probably sacrifice some potential subscriptions to be competitive with Sony, to not have the price of subscriptions feel like a reason to buy the other guy's platform. I think that's a reasonable choice they've made. But it will probably cost them some subscribers. I do believe that over time, publishers are not going to put out services that lose them money. In the near-term, to compete, you sometimes give things away that don't make sense economically. That happens a lot in the game industry when it comes to online services. There's more ego competition than there is business rationale behind some of this stuff.