It’s hard to seem edgy and hip when you’re the world’s largest software corporation. While most people tend not to use those words to describe Microsoft Corp., Robbie Bach is aiming to change that. As the president of Microsoft’s entertainment and devices division, Mr. Bach oversees everything from Microsoft’s Xbox video game business and its Zune media players to its Windows Mobile and in-car technology initiatives. While Microsoft continues to drive most of its profit and revenue from sales of Windows and Office, Mr. Bach is the man tasked with building the long sought third pillar of profitability for the company. This week at the 2010 Consumer Electronics Show in Las Vegas, Mr. Bach sat down in an exclusive North American interview with Financial Post technology reporter Matt Hartley, to talk about how Microsoft software is changing the auto industry, the future of the Zune and Microsoft’s revolutionary video game interface technology Project Natal.

Q What does Project Natal do to the shelf life of the Xbox 360? And where we are in the console cycle?

A I think in many ways we’re still on the upside of the console lifecycle. Historically, the content cycle has been driven by graphic technology. There’s still plenty of power available in the Xbox 360, there’s still plenty of power available in the [Sony] PlayStation 3. Nintendo probably can’t say that. They may have a capacity and a power problem on the graphics side that they need to deal with. But when I look at the [overall] cycle, I think there’s still plenty of upside given what we have today.

The console world has changed fundamentally in a very important way: Innovation doesn’t require new hardware. The fact that we can deliver a new Xbox Live service every year is a very powerful thing and completely changes the experience without changing the console, without requiring the industry to reboot every five years. The fact that we can introduce something like Project Natal and have it work on every Xbox 360 and create an entirely new way to interact with the system speaks to all of that. For the industry, I think this is a tremendously positive thing. For consumers I think it’s tremendously positive. The thing you have to be careful about, and the thing we will watch intensively, is you have to keep producing innovation. I know we’ve started down the back side of the cycle when I say ‘hey, there’s innovations and ideas we have that we can’t implement on the system.’ That’s when you have to start thinking about what’s next.

Q When Nintendo’s Wii console came out, third-party game publishers had tremendous difficulty creating games and making money from the console. Do you see a similar problem arising with Project Natal?

A I think it has a little to do with the trend towards natural user interface and much to do with differences in the business models between Nintendo and Microsoft and Nintendo and Sony. Our model is certainly about third-party publishers making money. We design our system for third-party publishers. We use our first-party business — Halo, Alan Wake and those sorts of things — to show people the way and to drive innovation. Nintendo, and this is no disrespect, just has a different model. They make most of their money through first-party games that Nintendo produces. That’s absolutely their business model. And it’s a great business model, it’s just different, but it makes it hard for third-party publishers.

Q You said during the Microsoft CES keynote that Project Natal will be available by Christmas. What kind of content and games can consumers expect to see by then?

A Part of the reason we showed Natal at [the Electronic Entertainment Expo video game trade show] — which is actually a little bit risky to be honest because it’s a new technology, very cutting edge and relatively early in its development — is that we wanted third-party publishers to know that it was real and we wanted them to have developer kits and to get them working on it. We have something like 70% or 80% of the publishers in the world already doing Natal-based games. Our first party studios are [also] very focused on this. We want to have a few titles from Microsoft that show the way and then we want the breadth and power of the ecosystem from our partners to bring lots of new ideas, new innovations, new concepts to the marketplace. Xbox games don’t go away; you have to think of all this as additive. I think it adds to the beauty of what’s going on.

Q Let’s shift gears to the Powered by Microsoft in-car technology, which is in your division. Obviously, one of the biggest stories over the last year and a half has been the rise of mobile applications and the different kinds of software you can put on a device. I’m curious how that evolution enhances the in-car experience and what you guys are doing to bring new experience through that.

A In-car experiences with technology are going to have two forms: One form will be things built into the car itself, this is Ford Sync, the Uvo service from Kia, its Blue & Me from Fiat. Those three happened to be powered by Microsoft technology, but I’m sure there will be others. The second thing that will happen is that people will bring portable technology into the car as well and this will be phones. It has historically been navigation devices, although I think that market is probably going to move to the phone platform relatively quickly. So Microsoft’s going to play a role on both those places.

Q Windows Mobile phones look nice, but you don’t have much control or influence over the hardware. Isn’t one of the reasons the iPhone is so successful is that Apple controls both the ecosystem and the hardware?

A You have a dichotomy: choice versus control. When you go out and look at the wall of PCs, part of what makes that wall of PCs is that the [manufacturers] have the freedom to create what they want to create and that choice is tremendously valuable to consumers. The reason it works in the PC space is because early on we did choose to exercise some management of what makes a PC, and there are standards that were developed — largely by us — but with some other people, and so Windows 7 works great on lots of devices. I will tell you if there’s a place where we haven’t done as good work is in the mobile space. We’ve been, in a way, too focused on how many devices we could have and not focused enough on making sure that the base quality of those devices is very strong. So one of the things we are working on with our [manufacturing] partners is ensuring that those experiences are consistent and work great and that the base line that you start with is always rock solid.

Q Microsoft Zune is a solid product that gets good reviews from critics, but it’s going to be constantly playing catch up to the iPod. What will make Zune a success?

A I think what’s going to make Zune a success is moving from Zune being just a device to being a device plus an experience that appears on lots of different screens. That has multiple implications. That is why we moved Zune to Xbox, that’s why we have Zune on the PC. I think it’s been very successful on Xbox. That’s a place where we can start to grow the brand. One of the biggest issues we have with Zune HD is not that the brand is bad, it’s that the brand is not well known. It’s hard to spend enough money to be more well known, considering what Apple has already done with iPod and which they now leverage with iPhone and iTouch. So, we have to find broad markets where we can expand, and certainly bringing Zune to Xbox is an example of that. But it’s very clear that the portable music and video marketplace will end up being part of the phone. So that creates a new opportunity for everyone to introduce those things into phones, and the thing that has held it back has been battery life. And that’s changing. Screen resolution has also been holding it back a bit and technology is catching up on all those things. Zune HD isn’t that far away from being a phone and no, we’re not doing a phone, so please don’t start those rumours. But from a technology perspective, it’s not far away.