FORTUNE — Phil Spencer, the new head of Xbox at Microsoft, came from game development, a similar career trajectory as Electronic Arts CEO Andrew Wilson. Spencer worked on games as varied as Voodoo Vince, Gears of War, Halo, and Forza over his 25 years at Microsoft. He now leads the Xbox, Xbox Live, and creative teams, which include Xbox Music, Xbox Video, and Microsoft Studios, as well as Kinect, Surface, Windows PC, and mobile phones.
With Microsoft (MSFT) chasing Sony (SNE) in the early leg of the next-generation race (Sony has sold more than 7 million PlayStation 4s, while Microsoft has “shipped” 5 million Xbox One consoles), Spencer has been tasked with repairing the early PR damage that plagued last year’s Xbox One launch and enticing gamers to upgrade to next-generation gaming and entertainment. With the success of Electronic Arts and Respawn Entertainment’s Titanfall, a Microsoft exclusive, Xbox seems to have righted its interactive ship. Spencer, a gamer at heart, offers his thoughts on the evolving videogame landscape, which includes the burgeoning free-to-play games space and virtual reality, in this exclusive interview.
Fortune: What did you learn from the Microsoft launch last year and the early vocal opposition from core gamers around issues like DRM and used games that ultimately reversed some functionality of Xbox One?
Spencer: We took the feedback we got last year to heart. I took it personally — you’d be hard-pressed to find someone at Xbox who didn’t. Early on, we could have done a better job communicating our intent more clearly, but I’m proud of the way we responded, changed our plans, moved forward, and ultimately delivered a successful product that fans are really enjoying. We were reminded just how important it is to listen to our fans. We proved they can impact the products we make. Maintaining an open dialogue with Xbox fans is a commitment we’ll continue to uphold.
What role will exclusive games play in this generation of the console battle, especially as fewer “AAA” games are being developed today vs. past console generations?
Exclusive games will continue to play a major role for Xbox in the new console generation, just as they have in previous generations. I’m a true believer in our exclusive platform features like Kinect, SmartGlass, and the Cloud, but games have always been the bedrock of our consoles at Xbox. On Xbox One, we came out of the gate strong last November with Forza Motorsport 5, Dead Rising 3, and Ryse: Son of Rome, and we haven’t slowed down having just released Kinect Sports Rivals, and of course Titanfall. This E3 is important for us to show gamers our future plans for exclusives and third-party support.
Right now I think we have a strong lineup of in-development exclusives, including games like Sunset Overdrive, Project Spark, Quantum Break, and Halo, in addition to some exciting titles you will hear more about at E3. It’s going to be great at E3 to be able to share the games coming exclusively to Xbox One, and it’s only going to get better.
What do you feel the game industry has learned from the success of Titanfall when it comes to campaign modes for shooters?
First, I want to congratulate our partners at Respawn and EA for creating a truly amazing game. We’ve been very proud to partner with them and feel honored to share a part of that success.
My hope is that Titanfall has affirmed one of the most fundamental principles of game development I believe in: A great game can come in all forms, shapes, and sizes. There’s no set formula or checklist you need to hit. When you assemble a team with a passionate vision and arm them with the platform and tools they need, they can do amazing things. Titanfall’s early success has proven that, and I think that’s very inspiring.
What are the challenges for the console business today as mobile devices become more powerful so quickly and other companies like Valve, Amazon, OUYA, and NVIDIA enter the games space?
The competition for how people spend their free time is as old as the games industry itself, but there are certainly more people playing games than ever before, on numerous devices with a seemingly unending pipeline of content. I see the success studios are having with gamers on all these different platforms as a great opportunity to learn. Games like Minecraft and World of Tanks found their success off of console, and we’ve learned a lot as a platform on what it means to create a place where those games can be successful on the TV. There is more opportunity here as you see more and more hit franchises growing that don’t come to AAA consoles, but I think could.
What is Microsoft doing to attract more independent developers to the Xbox platform?
We launched ID@Xbox to help developers of all sizes self-publish games on Xbox One, and we’ve been thrilled at the response to date, as we’ve received interest from thousands of developers to join the program, shipping dev kits to more than 250 creators. Just last month at GDC, we shared a sample of 25 games coming to Xbox One via ID@Xbox, including several I’m particularly excited about like FRU and #IDARB.
Our goal is to provide independent game creators with the tools and support they need to navigate the long and often expensive development process. This includes everything from free access to Unity tools to giving each developer two free dev kits. Long term, we also have plans to enable any retail Xbox One to become a dev kit, making it even easier for games to come to the platform. Chris Charla and his team have done an amazing job working with each developer in the program, providing constant communication to ensure developers have what they need to be successful, know the ins and outs of the Xbox One platform, and can build fun, innovative games.
What role do you see indie games playing in the games business today?
I love all kinds of games — independent games, blockbuster franchises, new IP — a good game is a good game, and we want as many as possible on our platforms. Independent developers are a vital part of that equation, and their games can range from niche fan bases to AAA titles on par with blockbuster first-party games. Independent creators are in a unique situation where they’re able to really experiment and map to their own priorities and timelines. In a way, they challenge the rest of the industry to stay on their toes and continue to think outside of the box in creative and compelling ways. As a program, ID@Xbox was designed with these developers in mind, and I personally can’t wait to see what’s to come.
With free-to-play dominating the PC and mobile games business, what opportunities do you see in this space beyond World of Tanks?
With low barriers to entry, free-to-play games are quickly becoming an exciting new way to deliver fresh content to players, as well as uniquely designed gameplay experiences that might not otherwise fit into traditional models. We’re excited to continue to support these types of games on Xbox Live, like World of Tanks, as well as Warface from Crytek and Project Spark coming later this year.
What are the challenges of creating compelling second-screen experiences for Xbox games?
For me the question is always, how do you create something on a second screen that’s truly a companion experience that enhances the game without it being a distraction? Dead Rising 3 was a great example, where Capcom turned your SmartGlass device into your character’s phone, so it meshed seamlessly into the world of Los Perdidos. It wasn’t a requirement, but it was a helpful tool. Other games use SmartGlass less for gameplay and more for menu navigation, and that works well too. It all just depends on what’s right for that particular game, and my hope is that as other developers see the kind of thinking teams like Capcom have put into their use of SmartGlass, we’ll continue to see that functionality expand.
That said, we know that most developers will focus first and foremost on the on-screen experience, as they should. But as we continue to support and build on the functionality of SmartGlass, and as SmartGlass-enabled devices get more and more powerful and dynamic, my hope is that we see developers continue to embrace the functionality to break new ground and enrich gameplay experiences overall.
With Facebook acquiring Oculus Rift and Sony entering VR with Project Morpheus, what impact do you feel virtual reality will have on gaming moving forward?
Virtual reality is a really interesting area, especially for games, and while it seems like it’s been “just over the horizon” for the last 20 years or so, I think we could finally start seeing it prove out soon for both gamers and developers. As I talked about at GDC, our Microsoft research team has been playing with virtual reality for quite a while, and while we don’t have anything to officially announce, it’s clearly an area people are excited about. The potential is definitely there.
As Xbox Live continues to grow, what opportunities do cross-platform projects like Steven Spielberg’s Halo video series and the Halo game universe open up for Microsoft?
We are starting a new chapter at Microsoft, with the strategy to create a family of devices and services that empower people around the globe for the activities they value most, and entertainment always ranks high on that list. We’re looking for ways to marry amazing programming — such as the Halo universe — with the powerful technology and rich social community we have with Xbox within the larger Microsoft ecosystem. Whether you are using your Xbox, PC, tablet, or phone, we want you to have access to an immersive, personalized, and entertaining experience.