Acquired - Episode 4: Bungie (with Xbox Co-Founder Ed Fries)

Episode Date: November 30, 2015

Ben and David are joined by Former Microsoft VP and Co-Founder of Xbox, Ed Fries, to discuss the Bungie acquisition and the development of Halo. Highlights include: Ed’s call with Steve Jobs after the acquisition, and sharing the stage with Steve and Bungie Co-Founder Alex Seropian at the Macworld Keynote.Bungie today, and the unlikely path to get there led by Harold Ryan.How to find something that all parties want to get a deal done, the creation Peter Tamte’s spin-out Mac gaming studio, and orchestrating the division of current Bungie projects and assets with Take-Two, led by Ryan Brandt.Saving a project that’s off schedule and missing the mark, and how Jason Jones led the effort to make Halo 2 a hit at launch.Sponsors:ServiceNow: https://bit.ly/acqsnaiagentsHuntress: https://bit.ly/acqhuntressVanta: https://bit.ly/acquiredvantaMore Acquired!:Get email updates with hints on next episode and follow-ups from recent episodesJoin the SlackSubscribe to ACQ2Merch Store!

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Ben. The audio in today's show is a little degraded since we recorded from Skype, but we're super pumped about the show nonetheless. Bear with us and we'll get the kinks worked out for future shows. Hello and welcome to episode four of Acquired, the podcast where we talk about startup acquisitions that actually went well. I'm Ben Gilbert. I'm David Rosenthal. And we're here today to talk about the Bungie acquisition by Microsoft. And most importantly, we have a very special surprise for everyone. This is our first episode with a special guest and we have a really incredible one for you guys. Joining us today is Ed Fries, who was at Microsoft during the acquisition and actually was the person at Microsoft whose group led the acquisition of Bungie. So we're very honored to have Ed with us today. He was at Microsoft from 1986 to 2004, led the acquisition of Bungie and among many others.

And today, he's a prolific angel investor and startup advisor and board member in the game space and others in technology, which is how we got to know him. And we're totally honored to have Ed with us today. Thanks. I didn't realize I was your first guest. That's exciting. Yeah, we try to keep that part secret. Now everybody knows.

Because they're all pros. I know. It's good. David, you want to do the acquisition history and facts? Yeah. So most people are probably familiar with Bungie, the creators of the video game franchise Halo. The company was founded in the early 90s by two undergrads at the University of Chicago, Alex Seropian and Jason Jones. And they made a few games, mostly for Mac,

actually, during the 90s, including hits such as Minotaur, The Labyrinths of Crete, and others. And then they had their first breakout success with a game called Marathon at the end of 1994, and then had a couple of successful sequels and other projects that came out of that. Ben, you have a fun personal history with... Yep. Yep. Yeah. Actually, my dad was a reviewer for the Mac users of Delaware of Marathon kind of in the real early days before it came out. And then as the trilogy unfolded, we actually... He sent me some pictures last night. We actually have the collector's edition box set of the Marathon trilogy for Mac. Pretty cool. And so that was Bungie for most of the 90s.

And then in the late 90s, in 1999, they unveiled to great fanfare their next project after Marathon, which was a game that they were calling Halo. They actually unveiled it at a Macworld keynote in the summer of 99, and it was introduced by Steve Jobs himself. And they continued working on it for another year. And then in the summer of 2000, there was a twist, and Ed steps in. And Microsoft, in June of 2000, announced that they were acquiring Bungie and Halo and that Halo would become an exclusive launch title for the forthcoming Xbox console, which was going to launch the next year. And everything changed at that moment.

So, Ed, thanks again for joining us. Take us back to, you know, it was 15 years ago now. How did it all happen? How did it come together? I was also a Bungie game player even before I started running Microsoft's game business. I played a couple of games in their Myth series, which was their real-time strategy series. And so I was a big fan of these guys. I knew that they did really good work. We got final approval to make the Xbox at a meeting.

We called it Valentine's Day Massacre that happened in February 2000. And so starting then, my life was really crazy because I knew that I needed a portfolio of games ready for launch in you know November 2001 which was less than two years away normally games take and no developers even knew about the Xbox at this point right yeah I mean very you know it was it was just an idea before then. And so I was desperate for content. And what happened was one day my phone rang, and it was a guy named Peter Tamptey who did biz dev for Bungie, who I had gotten to know over the previous few years. And he told me that Bungie was in bad financial trouble um they were uh they

were running out of money and they were likely going to be acquired if nothing else happened that they were going to be acquired by take two take two already owned a third of a third of bungie from an earlier transaction um and he wanted to see if i was interested that by the way there's some debate about this point because also there John Kimmich was also involved so there's a guy named one of our product planners John Kimmich his his job was to go out and talk to lots of game companies and so he was also talking to them at the same time so I don't know if I talked to him first or John talked to him first but it doesn doesn't matter. Peter called me, told me this stuff. And, uh, and, uh, I said,

yeah, I'm very interested. I mean, I, I really respect your work and, um, and I'd love to, I'd love to hear what you guys are up to. Um, and, uh, that was the start of it. Wow. And, uh, I mean, I got to imagine there were other, uh, maybe 15 or 20 or so launch titles for the Xbox when it came out. So, you know, you, you guys, uh, did do partnerships and, and, and with, with other game developers out there, you know, was there something special about Bungie kind of, or Halo in particular, or,

um, uh, just that you knew these guys were talented and the conversation started and went from there. Did you have other high profile targets that you were looking at? You know, at that time, if any talented developer walked through my door,

I was going to try to do a deal with them because I had, I had a big pile of money. That wasn't my problem. I had less than two years and I needed to try to get this portfolio done. And so I was definitely happy to talk to them and try to put something together. Did you try to do any other acquisitions at this time? Were you thinking about doing like an all first party launch if you could get it with the pile of money? No, we were always going to do a mix of first and third party. We knew we needed that.

And at launch, it was about half and half. We had signed a deal with Lorne Lanning and his group, Oddworld Inhabitants. That was probably the first big deal we did. And that was kind of the big deal because we pulled them away from Sony, who had published their previous game. So, in fact, there's a funny Penny Arcade comic from the time where Lorne Lanning's talking about

how great it is to work with Microsoft and how he really wants to work with us. And then in the last panel, he says, plus they gave me this hat made of money. He's wearing this. What were some of the kind of selling points for bringing those guys in-house? I mean, you've got a lot of different tools at your disposal for coming and joining and working directly with and for know, with and for the company that's developing the platform.

What were your hooks for that? So, you know, we had done multiple acquisitions before we started the Xbox when I was running the PC business. Probably the biggest one is a company called FASA that did MechWarrior and Shatter all those. But we never went out with a goal of acquiring a company. Our goal was to find the best game developers in the world and support them whatever way was best for them. Whether it was publishing or acquisition.

Exactly. And so in this case case the developer was calling and saying we're running out of money bungee at that time was a developer slash publisher they did bull and that was it was more common then but pretty much all the little developer publishers were going out of business because doing distribution back then was becoming harder and harder for a little company to do i mean to try to knock on the door of a walmart and that kind of thing um probably especially as the world was shifting the console right yeah exactly so um so in their case they were both

a developer and a publisher and we're finding that that just wasn't going to work out anymore. And so that's where we started the conversation. Then I got a chance to see Halo, basically to see that trailer that they showed at Macworld and knew that this is something I really hoped I could get for us as part of our lineup. Did you or anybody else at Microsoft have any qualms about acquiring a company that was mostly a Mac developer at that point? Or was it just all about the content? No, I didn't care about the Mac thing at all, honestly. I mean, they had done myth versions

of their games, or I'm sorry, they did PC versions of their games, like a PC versions of their games or i'm sorry they do pc versions of their games like a pc versions of myth for example um so i knew that they could do pc versions and the xbox especially in the early days xbox was thought of basically as a pc disguised as a console so um i i wasn't worried about them having the technical ability to do it they were always working on on halo for mac before did you have to like tear it all down and re-architect it for PC and then do a PC port to Mac later? Or how much of Halo was already done when you had acquired it? None, basically.

Which is funny because if you watch the Macworld trailer, I think it was Jason who presented it on stage you know he makes a big deal about this is all running native on mac and being rendered real time yeah and it's got these wild animals running around and stuff yeah and what i loved is is um they don't actually show uh master chief or anyone else killing any covenant because i guess probably i could imagine apple didn't want any any deaths on stage at uh at mac yeah well i mean so so we could we can talk about the development of it let me talk a little more about the deal first if you that's okay yeah so uh the the thing was i wanted halo right and um and i wanted the development team that was working on halo i want basically

wanted all the all the developers in the company. But Take-Two already owned part of the company. So I had to call up the head of Take-Two, which is a guy named Ryan Brandt. And we kind of had to work out between the two of us how to split the company into two pieces. And so Bungie was developing two titles at that time. They were... Right, Oni, right? Yeah, Oni was developing two titles at that time. They were great. Oni, right?

Yeah. Oni was the other game. Very good. So Bungie had two teams, one in Chicago and one down in California. And the California team was doing Oni and the Chicago team was doing Halo. And so basically the deal I struck with Ryan was that he would get ownership of all the back catalog. So all the intellectual property for all the Bungie titles that had been published so far.

Plus we would finish Oni for them and ship Oni. And then the Oni developers, once it was done, would move to Redmond and become part of our team. And the Chicago guys would come as well. So basically all I got was the Halo IP plus all the developers. And he got Pony and the back catalog. And then between the two of us, we acquired the company basically. And some people think I got the better part of that deal.

I don't know. Honestly, at the time, though, you make the best decisions that you feel like are aligned with each of your incentives. And you do the most with that you feel are aligned with each of your incentives. You do the most with what you walked away with. Yeah. Ryan was great to work with. He and I did deals after that.

I don't think there were any hard feelings among any of the parties involved in the deal. Cool. One thing that I just totally lit up when I was reading about this last night, you got a, a few weeks later, once the deal was announced, I got mail from Steve Ballmer or got a call from Ballmer or something. And it just said, Steve Jobs is mad that you acquired Bungie. Call him and try to calm him down or something like that. He had this phone number and i'm like sounds like here's a noose go hang yourself i'm like uh okay i can do this uh so uh you know so

i dialed the number how long does it take you to work up the nerve to to dial this not very long but i i had an, which was good, which I'll explain in a minute. So I didn't just call with no idea. I called with an idea. And here's the thing. The irony of the whole thing was the whole deal started when Peter Tamtee, the BizDev guy from Bungie, called me. But when we acquired the company, we had room for everybody but him. We didn't have a job for him. And so I felt really bad that he, you know, he was like the one guy out of the acquisition who ended up without a job. But he had told me that he was, he wanted to start a Mac porting company. And anyway, so that was in my head.

And so when I got this mail that I'm supposed to call jobs, I kind of put two and two together. And so I call Steve and I say, hey, sorry, I'm the guy who bought Bungie. But we want to do a Mac version of Halo. And actually, I want to do a lot of other Mac, uh, games.

So, you know, I don't have anything against the Mac. I worked on Mac Excel. I worked on Mac word. Um, you know, um,

we have, uh, age vampires and all this other intellectual property, uh, from our PC gaming business. Um, and we would love to bring that to the Mac as well. Um,

and I know just the guy to do it. There's this guy, Peter Tamptey, ex-Bungie guy. He wants to start a company to take a bunch of PC games to the Macintosh. And Steve Jobs was really friendly on the phone. He said, that sounds great. Here, let me give you a guy on my team. And he assigned me to somebody on his team to work out the deal.

And that was a very short conversation and a friendly one. So it was good. So all of a sudden I had this deal for Peter Tamptey. Apple agreed to fund the creation of his new company, which was really cool. So he had someone to fund his new company. And we were going to get to port a bunch of our games to the Mac.

Maybe we'd make some money on that. So it felt like a real win. There was just one requirement from Apple, and that was that Alex Seropian and I show up to the next Macworld and be on stage with Steve Jobs to announce this new partnership. I was a little nervous about being a Microsoft guy going on stage in front of 10,000 Mac people. Well, Bill Gates had done it before.

In very dramatic fashion so but i'm like yeah you know if that's what it takes to get the deal done sure i'll do it so we agree and you know a few months go by and then it's time for mac world and um and so alex and i get on a plane and we fly to new york and uh driving in from the airport in a cab and i remember you know the phone rings because we're going in we just landed we were supposed to rehearse that afternoon and then the event was the next morning and uh phone rings and it's one of steve jobs handlers and they say uh rehearsal's really not going well steve's really upset with how how everything is uh We really don't want you guys to come in. Go and check in your hotel and we'll call you after dinner. I'm like, okay. So Alex and I go, we check in, we're waiting. The phone rings, you know, maybe seven o'clock at night and they say, it's still really going

badly. Jobs is really bad. Why don't you guys just come in the morning and i'm like well the event is in the morning and they say yeah yeah just show up you know and uh and we'll just brief you right before you go on stage okay okay so we get no rehearsal we're gonna go stand in front of 10,000 people and we're gonna say something for for a minute or so. But it's okay. So we show up the next morning and just before it starts, Steve Jobs comes over, shakes our hand, says, hey, I'm going to say this at some point during my talk. And then you guys just walk on stage, do your thing,

talk for 30 seconds, talk for a minute, and then I'll shake your hands and then you're off the stage again. Like, okay, we got this. So that's what we did. So you guys basically got to wing it on stage. We totally winged it. I haven't seen the video, so I wonder how bad it was. But I tell you, I mean, so those were my only encounters ever in my life

with Steve Jobs so I I mean it was always um he was always very friendly to me both both times I talked to him in you know on the phone or in person and um and he did an amazing job I mean sitting in the front row of a Macworld watching him you know just take the audience and just hold their attention you know was was incredible to see. It was really fun to be part of. Which is a good, it's a good segue. I mean, at that moment, you know, it sort of feels like everybody, you know, Steve Jobs is happy. Mac users are happy. Halo is still coming to the Mac. Take two gets Oni. You get a great launch title for the Xbox coming out the next year. And then Halo launches.

And we'll dive into so many questions about that. But for the probably two or three of our listeners out there who don't know what happened next. You know, Halo goes on to the first Halo has, I believe, a 50% attach rate to all Xboxes sold within the first year of launch, sells a million units in six months, six and a half million units over the lifetime of Halo, which would be estimate, there are no hard numbers out there, but kind $200 to $300 million in revenue just from the first Halo but then it goes on and becomes this huge cultural phenomenon and a franchise I remember in 2004 when Halo 2 launched I was

a freshman in college and people were organizing trips to the local, you know, GameStop to go buy Halo and Halo 2 at midnight. It was incredible. Yeah. Yeah. I think I was up for 24 hours. I mean, just the sheer amount of Mountain Dew and Cheetos. And, uh, and so Halo 2 ends up, um, when it launches in 2004, doing $125 million in sales on the first day and becomes the fastest selling media product in U.S. history. Bigger than any movie, any album. Really, it was an incredible moment for video games and technology in general. And then the kind of the rest of, well, I would say the rest of the story is history.

We'd love to bring Ed back in. And, you know, the Bungie story takes a few interesting turns along the way. But first, Ed, I mean, when you were desperate, you needed content for the launch. Could you ever, you knew Hilo was good, but did you think it was going to be like this? I hoped it would be. I have to tell you, I wish the ride on the inside was as smooth as the one you paint on the outside. It was a straight line, right? The Bungie guys were always incredible to work with super talented it was it was clear from as soon as we got them in that that this was an amazing group of people um but a little quirky too i mean you know like microsoft um just quirky from a

microsoft point of view like like microsoft everybody has you know private offices with a door that can shut and that's like the selling point of going to mic microsoft everybody has you know private offices with a door that can shut and that's like the selling point of going to microsoft or at least it was back in the day you got your own private office and so i proudly toured the bungee guys around this new wing that we had just built out for them in one of the buildings and it was all you know brand new private offices from one end to the other and they looked at me and they said we hate this i said what do you mean they're like we want all these walls torn out. We just want a big open bay. And I'm like, like with cubicles, you know, like that was like the lowest status thing

you could have at Microsoft, you know? And they're like, yeah, yeah, we want cubicles with really low walls. I'm like, oh, you're kidding me. I like, I wish I knew this a few months ago. So the facilities literally had to tear the walls out of this place. I'm like, oh, you're kidding me. I wish I knew this a few months ago. So the facilities literally had to tear the walls out of this place. So the acquisition price, never before disclosed, of Bungie was whatever you paid for Bungie, plus all the two remodels you did to buildings and equipment. I mean, the great thing about working at a big company like Microsoft, when it came to acquisitions, the corp dev people were so incredible. The HR people were so incredible. Somebody like me who ran a business could just basically say, make this happen, and it would happen.

And they would deal with so many details and so many difficult things. And facilities people as well. It's like, make these walls go away you know the walls would go away like magic but um so that was one thing so we tore out all the walls and gave them the space that they wanted and but you know every microsoft team has has a test team that supports them and it's a really important part of microsoft culture and uh and they didn't want testing they're like we don't want to we don't need testing and i'm like yeah you do you really need you really need a group

of testers this is the way we build software on microsoft did all the engineers just test their own code or they trade testing responsibility around you know it's pretty typical in the game business especially back then you know it's like they thought of testers as a bunch of high school kids, but not professional testers like we had at Microsoft. And so the other thing the Bungie guys wanted was they wanted secure access to their area. They wanted the only Bungie people, and I suppose me and a few other people,

could get into their area. So they had these doors that needed card key access to get into. And so anyway, they didn't want the test team. I'm like, fine, I'm going to give you a test team, and I'm going to park them right outside your secure doors. Okay, so they're going to sit right outside your doors. And what happened was that test team was run by a guy named Harold Ryan. And the test team really proved themselves to Bungie over the period of that first Halo. They showed them what a group of professional testers can really do.

And an example is they built a giant render farm out of a big pile of xboxes and the render farm brought the time to build to make a new build of halo down from i don't know eight hours to a half an hour or something like that um so you know so the next between halo 1 and halo 2 they moved that wall that secure wall to the other side of the testers so that now the testers were part of the family so how's that how's that for tangible success and you still even even with the addition of testers though i mean one of the things that i think is um so incredible about bungie is later on in bungie's history in in 2007 it ends up getting respun out from microsoft and uh when that happened there were only 120 people working there i think including the testers.

Do you know who the president of Bungie is right now? Harold Ryan. Oh, really? How about that? That's awesome. Embracing testing. So anyway, so that's a story for you. When we first started showing Halo around to the game press,

there was a lot of skepticism. They were wary about Microsoft entering the console business to begin with. They thought we really didn't understand console games, which was true. And then we were really excited to show them a first-person shooter, which is a PC genre, looks like a PC game. And they're like, you know, this isn't Mario. This isn't Sonic. You know, this is just proof you guys don't get it.

So we got a lot of pushback from the press, actually. E3 2001, we only had half-speed graphics cards in the machines that we had at that time. And so it didn't show that well on the show floor. There was more kind of rumbling in the press. There's Penny Arcade comics from that time where the Penny Arcade guys are really down on the game. I don't know if I can swear on your podcast but one of them just says halo is shit and so and so coming into launch it was very unclear whether halo was going to be our hit title i mean we you know we're all playing it you know after hours and saying you know is

this game as good as we think it is because this this seems amazing. But we're kind of all PC gamers, you know, and we're, well, maybe we're drinking our own Kool-Aid here. You know, maybe console gamers won't want this kind of a game. Did you have to, in preparing for the launch, establish what was going to be your flagship game for varying marketing channels and the way that you're talking about the platform and what you're showing off? Or did that sort of organically fall out after you released it? No, absolutely we did. Because we had a certain marketing budget and probably

the biggest thing we had to decide was which titles were going to get TV. And the TV budgets, we could afford to do TV for just a couple titles. And so Oddworld and Halo ended up getting basically equal treatment at launch with big TV campaigns from us. And Oddworld was kind of our, well, this is a developer's known to console world.

I should say the game was called Munch's Odyssey. Oddworld's a company. So that and then Halo, that's kind of the way we're sort of not sure which of these games is going to do best for us. Yeah, still not sure. In sort of that early launch stage like that, how do you know and how fast do you know

which of those two is going to be? Well, once things start to sell and reviewers get their hands on it, it becomes clear really quickly. But especially back in those days, there were a lot of things that had a lot of lag when it came to marketing. So anything that was in print, for example, it was maybe a three-month delay uh if you wanted to be in um in mailers or not not mailers but um like uh say like a christmas catalog that gets inserted and insert into um newspapers and stuff like that uh magazines it was all like three months or four months uh so we always had to commit to the marketing team three or four months in advance when a game was going to ship.

And then if we weren't there, if one of these circulars ran, but the product wasn't available in store, we could get fined, right? So that was always built into our development process. But it's not like today where information just goes boom out there right away and you can make changes right away. I mean, there was actually stuff printed with ink, you know, sat in warehouses. Yeah. Hard to imagine. I'm curious. I really want to ask, especially because the whole theme of our show is thinking about technology. And while there's certainly a huge element of, you know,

both Bungie and Halo and our very first episode, we did Pixar of just content and creativity. There also is a huge element of technology in Halo and Bungie and new technology. And I'm curious from your guys' perspective, you know, to me, the story that I write in my head is

the single-player experience of Halo is good. It's great. I'd buy the game. I'd play it. But what made Halo was multiplayer and networked multiplayer. Yeah, I remember buying a router specific... Actually, no, I didn't buy the router because I went through my dad's old bin and got one. But doing a router and stringing four xboxes together in my friend's basement yeah for xbox live it's the only way to do that i think every high school kid in america did that at the

time that's exactly right i mean it was one of the only games that you could do that or you know because xbox live didn't come out for a year later, right? And so people came up with all kinds of... I remember you could hook your Xbox to a PC and then people would do the... and then do these PC connections over the internet. Yeah, you could install software on your PC. But it was all like, yeah, handmade and... How much did you guys either A,

well, both A, think about that beforehand in terms of this incredible experience of playing with your friends, but then B, how much did that shape the eventual launch of Xbox Live and Halo 2, you know, being, to my mind, that first real triple A style, fully realized experience of what playing with other people and your friends anytime you wanted yeah so um i mean a few things it's it's amazing how much that team accomplished in less than two years i mean that is not very much time in the game business and you know not only did they have the single player but they had they had multiplayer but they also had split screen and split screen multiplayer they had network multiplayer they also had split-screen multiplayer. They had network multiplayer. They also had split-screen co-op play, which you don't even have split-screen co-op play in Halo 5. It just ships.

Yeah, controversially. I mean, it was amazing what was in that first game. But yeah, after they shipped Halo 1, then working with the Xbox Live team, helping them develop Xbox Live and develop how games would work on Xbox Live.

That was a big thing for the Halo team. They worked really closely with Xbox Live. Tons of Halo fans on the Xbox Live side, so they really wanted to work with a bunch of guys. It was a very mutual respect experience there. You know, the problem is Halo wasn't due for, you know, a few more years.

Halo 2 wasn't due for a few more years. And I can talk a little about that and what happened there. So somebody reminded me the other day that actually the first Xbox Live title that we launched with our first party group was actually out of that, that facet team that I mentioned earlier. And it was a mech commander was the first one. But anyway, meanwhile,

the bungee guys are go off after shipping halo one. And, and a couple of things happen. Jason Jones, who's, you know, just the creative genius behind everything Bungie, um, decides he's going to, um,

leave the Halo team and start a new project. And so he and a small group go, go off on the side and they start to work on this new project. Meanwhile, the, the Halo guys, the main Halo team starts working on Halo guys, the main Halo team, starts working on Halo 2. And they get a couple years into it, and it's kind of going off the rails without Jason running it. So Jason comes back, and he looks at it. And this is about a year before it was supposed to ship.

And he's very unhappy with it. And the team has a lot of problems. They tried to do too many things technically. They tried to do this new lighting model that really didn't work. I mean, I love you guys tell this story like it's so nice and smooth. And Halo 1 came out and Halo 2. You know, for me, it was like this nightmare. It's like Halo 2, it's all screwed up, you know.

And then Jason comes back and he's like halo 2 it's all screwed up you know and then jason comes back and he's like i can fix this and he goes through and just like you know redoes a whole big part of halo 2 um but in order to do it he needs a whole nother year so it's going to instead of being out in 2003 it's going to be out in 2004 and uh so I have to go to Robbie, my boss, and tell him he's not going to have Halo 2 until 2004 and blah, blah, blah. Anyway, it's not my favorite memories, but I'm glad you liked the game when it came out.

So yeah, anyway, that was, you know, Jason got it back on track and they were able to bring out a game that was really special. It's so, so interesting. David and I were talking before this about a parallel to a previous episode. Actually, our first one is Disney acquiring Pixar. And, you know, so many parallels because it's a, you know, a creative hit space business where, you know, you're doing the creative studio work in-house and putting this thing out

and hoping it really resonates with people. And one of the things that makes that process work is the ability to have that honest conversation internally and the mechanisms by which you fix things when you're off the rails. And there's this incredible parallel here to the story of Toy Story as it was being developed where that went totally off the rails. Toy Story as it was being developed,

where that went totally off the rails. Toy Story 2. No, Toy Story 1, the original. I'm pretty sure. Yeah, I think I've read this too. Yeah. Where Woody was mean. Yeah. And they were, they were screening the, the, you know, as far as they had gotten, and it wasn't fully rendered and fully realized, but the the story they had to change the story and rip apart a bunch of storyboards and and i think delay a year because it was just like you were watching the movie and it didn't feel nice and it didn't feel right and it wasn't the experience they were trying to create and they were getting a bunch of feedback i think from katzenberg or something and it was yeah all screwed i know i know you don't really want to see how this stuff is made on the inside. It's like, oh, this game is awesome. It's all magic in one way.

Same thing in regular startups, too. Exactly. I don't want to dwell on this for too long because it's not a super core part of the story. And you had left Microsoft by this point. But, you know, Halo 2, despite the sausage making being a nightmare for you, goes on to become the most successful, I think, video game of all time at that point when it was launched. And then Halo 3 even eclipsed that and helped launch the Xbox 360. But then after Halo 3, Bungie spins out of Microsoft. And you were gone, so you may not know, but to the extent you do, how and why did that happen? Microsoft ended up retaining a stake in Bungie, but and Bungie kept working on Halo through Reach and ODST.

But how did that happen? OK, so I'm going to I'm going to tell you what I understand about the story. And, you know, everything up until now, I've talked about stuff I was directly involved with. Now it's more like things I've heard. So I apologize in advance to anyone if I get something not quite right here. But after Halo 2 shipped, there was a disagreement about royalties. There was some kind of royalty agreement between the person who followed me and the guys at Bungie.

And after Halo 2 shipped, the Bungie guys felt like that deal was not followed the way they thought it should be. And they decided they would be better off separate as a separate company again than part of microsoft and they went into negotiations uh with microsoft to figure out how they could split out and do that and my understanding is microsoft agreed to let them go go out and become an independent company under the conditions that they do a certain number of titles. And once those titles were made for Microsoft, they were free to go, basically.

And so they entered into an agreement to do that. And I think those titles were Halo 3, Halo ODST, and Halo Reach. And so after they finished Halo Reach, they went on to do their new game, Destiny. cybersecurity companies today. It's purpose-built for small to mid-sized businesses and provides enterprise-grade security with the technology, services, and expertise needed to protect you. They offer a revolutionary approach to managed cybersecurity that isn't only about tech, it's about real people providing real defense around the clock. So how does it work? Well, you probably already know this, but it has become pretty trivial for an entry-level hacker to buy access and data about compromised businesses. This includes endpoint detection and response, identity threat detection and response, security awareness training, and a revolutionary security information and event management product that actually just got launched. Essentially, it is the full suite

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So Ed, one of the things that we like to talk about a lot are trying to figure out and pattern match the things from an acquisition that made it successful, that made that experience where, you know, the value of the small company plus whatever it was that the big company brought to the deal, the combination of those three things is a gigantic multiple of the two parts and they're separate. It's kind of a one plus one equals three thing. What characteristics and, you know, what actions and what things transpired that made this so successful? Well, I think, you know, most game developers pretty much feel the same, which is like,

I just want to make an incredible game. I want to have the resources to make the game that I have in my head, you know, and then I want to see it have an honest chance to reach its market, right? To reach as many people as possible so um you know if you think about trying to do that as a little struggling independent company like bungie was versus trying to do it under the umbrella of microsoft that's about to launch a brand new console and has a 300 million dollar marketing budget and it's going to you know make a lot of noise about this new platform i mean that's, that's a big opportunity for someone

to have their ideas and their creativity ride along with that big push. So that's, I think, what's in it for a game developer to want to team up and be part of this bigger thing. I think the challenge along the way is, and this is something I worried a lot about and we worked hard on, is how do you... I mean, one of the things that makes these teams special

is they have their own unique culture. That's what you should hear when I'm saying Bungie wanted to rip out the walls because they worked super collaboratively as a team. They wanted the programmers and the artists to be able to just shout to each other across

this room. By the way, if you go to visit Bungie's office now, it's in this giant what used to be a movie theater. It's a giant bay. It's still completely open because that's part of their culture. You know, so how do you integrate something creative into a bigger company like Microsoft and still protect it so that it can have its own unique culture? I think that's really the challenge of management that's running something like that. Yeah, and there's obviously a tension you have to manage there between efficiencies of the larger business

and respecting the culture of the smaller. Did you struggle at all with the decision to move them to RedNet? I didn't, but in retrospect, I probably wouldn't have done it later. We went through multiple other acquisitions over time, and I think the more you can do to preserve the culture of the company, the better, because I think that's, that's really what makes them unique. And that uniqueness, at least in the entertainment world is really important. You know, it expresses itself in the product itself. So, you know, I like to talk about how I had these two really great teams who worked for me.

One was called Ensemble Studios, and they did the Age of Empires series down in Texas. And another, the Bungie team. And if you looked at the cultures of those two companies, they were almost diametrically opposed. Like if you wrote their values down you know there would be like opposite lists you know like one would like bungee would be like we're hardcore you know and um and and ensemble would be we're a family you know you know i don't know stuff like that it would just be really different um and uh and And that kind of taught me that it's not, there isn't like a culture that works, you know?

It's like having a culture is what matters. It's not which culture you have that matters, you know? Having a strong culture that attracts, you know, specific people that fit within that culture and really enforcing it and really making it, you know, that culture ends up just expressing itself in the product. I don't know how else to say it. So, yeah, it's, it's so cool to hear you say that because, um, that's such a, uh, been a core theme of, of our whole show and part of the reason we decided to do this. Good. I haven't heard any other episodes. So, yeah well, you know, we talked about we talked about Pixar, we've done Instagram, and we've done Twitch. And all of those

are where companies that when they were acquired had a very, very strong culture that's so far, at least with all of them, been allowed to remain independent, and they've all thrived hugely. And for us, I think a big takeaway has been the importance of doing that. When you have a great culture, that's when great things get created. I think one of the things was we were able to bring those two bungee teams together, though, the Chicago team and the California team together in one spot. We needed that, I think, to get the Halo work done so maybe maybe in that case it was the right thing to do but in general it's not it's not always the right thing to do and then the

challenge you have in a bigger organization is what how do you integrate with the other parts of the company that need to work with you um i i had gone through a process of integrating marketing into my game teams when I was doing PC gaming business. And even though the marketing guys didn't technically report to me, they were integrated of a sudden this kind of bigger Xbox organization. And the head of Xbox marketing wanted to have all his marketing people under him sitting in his building. So they all got pulled out. And I think it was a really bad decision because, you know, they really got separated from the teams. And all of a sudden it was sort of an us and them kind of thing rather than that we're all working together.

We do different functions, but we're all trying to do the same thing. An example of that would be the first TV ads came back from the agency for Halo. And we showed them to the Bungie guys, and they hated them. They really, really hated them. There's a guy running around with a gun and he's shooting stuff and they're you know and you might think oh that's what halo is about that you know to the bungee guys that is not what halo is about at all you know for them halo is like the quiet before the storm it's that epic long vista that you see and realize you're

going to be heading there later you It's the original theme music. Yeah, it's the music. It's all that. So we had to like weigh back and try to fix this TV commercial. But that's the kind of stuff that happened when there isn't this integrated team working together all the way through so that they really understand the vision for the product. Yeah, it's so interesting thinking about just from my time at Microsoft when we kind of had the one Microsoft reorg and went functional from divisional.

And where's the appropriate place in the hierarchy to separate into divisions versus functions? So with functions being you have all the marketing people together for all the business groups and all the tech people together for all the business groups and all the tech people together for all the business groups versus, you know, having these sort of family units of these separate divisions where everyone's totally integrated. Right. It sounds like, you know, at least in this kind of creative endeavor space, the divisional kind of works better and all the different functions need to be super tightly integrated with each other. You know, I was at microsoft 18 times 18 years i mean so i don't know how many times i saw that organization that reorg happened back one way and then back the other and back one way and back the other you know it's like the grass is always

greener you know it's like one one way has a certain set of problems and the other way has a different set of problems and so it seems like they just toggle back and forth between the two i i don't really understand it but well one of the things we do on our show uh that that we really enjoy doing is um three segments in particular that we can run through quickly and ed we'd love uh we'd love you to participate too. The first is that Ben and I each assign a category to the acquisition and the kind of five we've identified, we could find more that break out of the box, but the five we've identified are people, technology, product, business line, or I guess fourth and fifth is, is other wildcard. But yeah, you know, for, for me, it's interesting, I really pegged Halo and Bungie

as a product acquisition for Microsoft. But it's interesting, you know, hearing you talk yet, it's really, I think you've given a lot of data to support people as well. Ultimately, I think I'm going to stick with product, because more than anything, because of the spin out that ended up happening later on and Bungie going on to leave Microsoft and that DNA to leave Microsoft and Halo sticking behind as a product for Xbox. What would you say, Ben? I'm not going to disagree. I think it's absolutely that um like you said there's there's definitely a a learning from um the folks at bungie about their culture and about how to produce that sort of game and bring it to a platform that nobody thought was

going to have a first person shooter like the pc and things like that but um yeah i think my vote would be product ed what do you think i'm sticking with the people for sure i mean i mean you know it's one thing to create a franchise and it's another to um to continue it is one thing i'd say you know and these are the people that that created halo you know out of out of nothing and so um you know it's true there's a different team that's that's moving halo forward now and um and they've added a lot of interesting new things to the to the franchise but bungie created it you know yeah and then they created destiny which i also think is very good so i don't know i i just always fall on the side of the people or what really matter in these companies well one of the pieces of feedback we've gotten is we need more disagreement on this show

so this is great we're going to bring people in like you had to disagree with us you're welcome back anytime if David and I keep agreeing we'll just bring in third parties that can gang up on us second to last segment. This is my favorite. We talk about, because this is about technology acquisitions as a whole, this show, we talk about, is there an underlying kind of generalizable and broader theme in technology that this acquisition embodies or represents. For me, and this is why I thought

Destiny was a great seg, you know, for me, the Bungie acquisition represents the power of whenever there's a platform shift in technology, and that happens very discreetly in the gaming industry where, you know, first it was, it was early PC gaming and early consoles, and then consoles really became dominant with, with the age of, of Xbox and PlayStation two, um, and, uh, and, and, and Halo and Bungie rode that success. And then, um, you know, in recent times, there's been the age of free to play, the two, the simultaneous age of free to play and mobile. And it's interesting to see, you know, Halo is still a huge part of the cultural landscape, at least in, you know, the media

landscape in the US. But the gaming industry, you know, has been, has moved on in a lot of ways. And what's big now are companies enabled by this next wave. And that's where Bungie's gone with Destiny. So for me, this power of whenever there's a platform shift in gaming or other parts of technology, the ability to not totally wipe away the companies and the winners from before, but create new companies and the winners from before, but create new winners and bigger winners. I think Halo and BungieX represent that really well.

Yeah, I'm going to, I mean, I see it maybe a little differently, but I'll pick the same milestones as you. For me, it was the time when, you know, the Bungie acquisition happened at a time when uh the publishers were getting bigger and there was consolidation among the publishers so uh it was getting this there was this economy of scale of being big at that time you know and that activisions and electronic arts and take twos and microsoft's had an advantage and the little kind of mom and pop developer publisher uh publisher was going away.

Bungie is an example. Another acquisition we did was a company called Access Software that did our golf and tennis and other games. And so these things start small, and then they get somewhat bigger. And then at some point, economy of scale really matters. Scale really matters. And then you start to see a lot of acquisitions. And so that's what was happening around 2000 when this Bungie acquisition happened.

It's also what's happening now in free-to-play. So to follow on your example, you know, I mean, you know, I was on the board of Z2. Z2 was, you know,

really early free to play company, um, had a bunch of, uh, of hits, um, trade nations and, um,

battle nation, you know, um, and, um, you know, at some point uh uh you know skill started to really matter in free to play you know if you're going to compete with uh you know uh clash of clans or uh or candy crush or something you know just these massive audiences and you really want to drive traffic to your to

your game, it really matters that you have this big audience out there. And so it was getting harder and harder for Z2 to compete. And, you know, just like Microsoft bought Bungie, it made a lot of sense for King to buy Z2. So I think, you know, there's kind of cycles to this stuff and we see it, you know, over and over again. You know, maybe it's not just one platform shift. Maybe it's just a natural evolution of each market as some new market comes.

You have a lot of little guys at the beginning, a lot of experimenters, and then change over time. And with that, I'll kind of take us into our last section where we render a conclusion. Grades A through F, you get pluses and minuses. And I'll kick it off by asking you a question ed do you think that the xbox would be the success that it is today if the bungie team and and your team didn't pull off this acquisition i really don't

i think i think uh halo is hugely important to the success of Xbox. I don't know if there would have been an Xbox 360 if there was no Halo with Xbox. So I think it was incredibly important. Famously, Microsoft criticized for years and years and years of not making money on Xbox and it not being something the company was serious about. And then where we see where it's gone today and being part of the same platform as Windows and doing so much

more than gaming. The company really taking the whole thing seriously and combined with the HoloLens and a lot of other future bets they're making. Minecraft, future episode. Really paving the way for the future of the company. It's pretty amazing to hear how important it was to the creation of the platform.

When I went to work on games in the mid-90s, I was leaving a successful career in office. I'd been there in 10 years. And I was told a couple of things. I was told that I was committing career suicide. And I was told, why would you leave office, one of the most important parts of the company, to go work on something no one cares about?

That was a great motivator for me to go make games, be an important part of Microsoft. I think you could argue a lot more people care about, maybe not a lot, at least as many people who care about Office care about games today. Yeah, I think it's an important part of the company. I'm proud of that. It's funny. This is like the part of the show where I always bring in Christianson, but like, boy, does that sound like low-end disruption, even in your career, right? You're leaving to go and play with the thing that nobody can take seriously, and it's a total toy, and how could it ever get big? And this is the thing that matters matters and it's the Titan that's been trucking along forever.

It's just so reminiscent of every startup that comes out of nowhere and then suddenly nobody can understand how everyone's taking it seriously and it's such a gigantic market. Well, I'll just say it's fun to be part of that. Yeah. All right.

Well, A plus. I showed my car. you know yeah yeah all right well a plus this is uh so we'll let we'll let ed go last here you know i've been struggling with this one uh and not just for creating disagreement for the sake of the show. But this acquisition, really any perspective you look at it, and that one that Ben, you, and Ed were just talking about is such a powerful one. Look at it financially. I mean, over the lifetime of the Halo franchise, and there's no way anybody could have foreseen this at the time, but it's made over $5 billion in revenue just from game sales alone.

That's before merchandise, that's before movies, that's before machinima, which was a whole other category that Halo really helped launch, although Microsoft didn't monetize by it. So really, any dimension you look at it, it's an incredible acquisition. The thing that I struggle with a little bit i come back to the spinoff and i think about what um what both halo and um xbox and bungee

what all three of them could have been if um that creative team had really continued being a central part of Xbox and gaming going forward. And for many years, while mobile was rising and while free-to-play was rising, Halo wasn't part of it. And I don't know. I think about what it could have been. So obviously it's a really great acquisition. I think I removed the plus because of that. So it's an A for me. So wait, your argument is that... I argue that there's some unrealized potential here.

Nothing against you, Ed. Yeah, do you think it's... Because it spun out. You're saying because they lost it again. Yeah, in 2007, which ended up being... It was the very top of the console market, or at least close to it, before the next wave was coming. And right then, Microsoft lost Bungie.

So are you blaming Microsoft missing mobile? Windows Phone is a direct result of the Bungie spin-out then. Well, even mobile gaming, right? Microsoft never had this incredible presence in in um console gaming and like when i'm sitting there screwing around on my phone playing clash of clans or whatever like it's it's not a microsoft property do you think that um there's like unrealized potential if that team had stuck there and that they i don't know i don't know maybe not and maybe maybe um maybe even destiny never would have happened within microsoft so i don't know but i look at

halo today and i think um and maybe it's just the natural course of things but i i uh it's not as culturally relevant as it once was and not as relevant to video gaming as a whole as it once was um okay well uh a few things uh microsoft had a writer for strafusal on destiny so they could have they could have published it if they wanted to so um whether they made the right choice on that or not i guess time will tell but um just that's just one thing to think about um i was probably involved in a dozen or so acquisitions, big and small, at Microsoft. And definitely the one that went the best was acquiring Bungie.

So I'm not going to give myself an A+, but I'll give myself... Yeah, you're grading yourself here. I'll go with A because this was the number one one that I was involved with. Oh, sounds good to me. It's kind of funny. We throw these arbitrary grades around, but it's sort of just a framework for us to get

to dig in a little bit and think about what could have been or what was unrealized. Sure. Thank you, Ed. We really appreciate all the time. Super special treat both for us and our listeners.

And like I said, you're welcome back anytime to disagree with us. Thanks a lot. It was really fun to be part of this. Yeah, we appreciate it. And for listeners, we are AcquiredFM on Twitter. Yeah, sorry this one went so long, but I just got real into it. So many great moments. Thanks again, Ed.

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