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

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[17] Hey guys, it's Ben.

[18] The audio in today's show is a little degraded since we recorded from Skype, but we're super pumped about the show nonetheless.

[19] Bear with us, and we'll get the kinks worked out for future shows.

[20] Who got the truth?

[21] Is it you?

[22] Is it you?

[23] Is it you?

[24] Is it you?

[25] Is it you?

[26] Sit me down.

[27] Say it straight.

[28] Another story.

[29] And welcome to episode four of Acquire, the podcast where we talk about startup acquisitions that actually went well.

[30] I'm Ben Gilbert.

[31] I'm David Rosenthal.

[32] And we're here today to talk about the bungee acquisition by Microsoft.

[33] And most importantly, we have a very special surprise for everyone.

[34] This is our first episode with a special guest.

[35] And we have a really incredible one for you guys.

[36] Joining us today is Ed Freeze, who was at Microsoft.

[37] during the acquisition and actually was the person at Microsoft whose group led the acquisition of Bungi.

[38] So we're very honored to have Ed with us today.

[39] He was at Microsoft from 1986 to 2004, led the acquisition of Bungi and among many others.

[40] 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.

[41] Thanks.

[42] I didn't realize that was your first guest.

[43] That's exciting.

[44] Yeah, we try to keep that part secret.

[45] Now everybody knows that.

[46] Because they're old pros.

[47] David, you want to do the acquisition history and facts?

[48] Yeah, so most people are probably familiar with Bungi, the creators of the video game franchise Halo.

[49] the company was founded in the early 90s by two undergrads at the University of Chicago, Alex Seropian and Jason Jones.

[50] And they made a few games mostly for Mac actually during the 90s, including hits such as Minotar, The Labyrinths of Crete and others.

[51] And then they had their first breakout success with a game called Marathon at the end of 1994.

[52] and had a couple successful sequels and other projects that came out of that.

[53] Ben, you have a fun personal history with...

[54] Yep, yep.

[55] 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.

[56] And then as the trilogy unfolded, and we actually, he sent me some pictures last night, we actually have the Collectors Edition box set of the Marathon Trilogy for Mac.

[57] Pretty cool.

[58] And so that was Bungy for most of the 90s.

[59] 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.

[60] They actually unveiled it at a Macworld keynote in the summer of 99, and it was introduced by Steve Jobs himself.

[61] And they continued working on it for another year.

[62] And in the summer of 2000, there was a twist.

[63] And Ed steps in.

[64] And Microsoft in June of 2000 announced that they were acquiring Bungy and Halo.

[65] And that Halo would become an exclusive launch title for the forthcoming Xbox console, which was going to launch the next year.

[66] And everything changed at that moment.

[67] So, Ed, thanks again for joining us.

[68] Tell us, take us back to, you know, it was 15 years ago now.

[69] How did it all happen?

[70] How did it come together?

[71] First, I was also a bungee game player even before I started running Microsoft's game business.

[72] I played a couple games in their Myth series, which is their Real Time Strategy series.

[73] And so I was a big fan of these guys.

[74] I knew that they did really good work.

[75] We got final approval to make the Xbox at a meeting.

[76] We called a Valentine's Day Massacre that happened in February 2000.

[77] And so starting then, my life was really crazy because I knew that I needed a portfolio of games ready for launch in November 2001, which was less than two years away.

[78] Normally games take...

[79] And no developers even knew about the Xbox at this point, right?

[80] Yeah, I mean, you know, it was just an idea before then.

[81] So I was desperate for content.

[82] And what happened was one day my phone rang, and it was a guy named Peter Tampi, who did BizDev for Bungi, who had gotten to know over the previous few years.

[83] And he told me that Bungi was in bad financial trouble.

[84] 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 2.

[85] Take 2 already owned a third of Fungy from an earlier transaction.

[86] And he wanted to see if I was interested.

[87] By the way, there's some debate about this point because also John Kimick was also involved.

[88] So there's a guy named one of our product planners, John Kimmick, his job was to go out and talk to lots of game companies.

[89] And so he was also talking to them at the same time.

[90] So I don't know if I talked to him first or John talked to him first, but it doesn't matter.

[91] Peter called me, told me this stuff, and I said, yeah, I'm very interested.

[92] I mean, I really respect your work, and I'd love to hear what you guys are up to.

[93] And that was the start of it.

[94] Wow.

[95] And, I mean, I got to imagine there were other maybe 50, or 20 or so launch titles for the Xbox when it came out.

[96] So, you know, you guys did do partnerships and with other game developers out there.

[97] You know, was there something special about Bungy, kind of or Halo in particular?

[98] Or just that you knew these guys were talented and the conversation started and went from there.

[99] Did you have other high -profile targets that you were looking at?

[100] You know, at that time, if any talented developer walked through my door, I was going to try to do a deal with them.

[101] Because I had a big pile of money.

[102] That wasn't my problem.

[103] I had less than two years, and I needed to try to get this portfolio done.

[104] And so that was definitely happy to talk to them and try to put something together.

[105] Did you try to do any other acquisitions at this time?

[106] Were you thinking about doing like an all -first party launch if you could get it with the pile of money?

[107] No, we were always going to do a mix of first and third -party.

[108] we knew we needed that.

[109] And at launch, it was about half and a half.

[110] We, you know, we had signed a deal with Lorne Lannning in his group Odd World Inhabitants.

[111] That was probably the first big deal we did.

[112] And that was kind of a big deal because we pulled them away from Sony who had published their previous game.

[113] So, in fact, there's a funny Penny Arcade comic from the time where Lauren Lannings talking about how great it is to work with Microsoft and how he really, really wants to work with us.

[114] And then in the last panel, he says, plus they gave me this hat made of money.

[115] He's wearing this.

[116] Yeah, what were some of the kind of selling points for bringing those guys in house?

[117] I mean, you've got a lot of different tools at your disposal for coming and joining and working directly with, you know, with and for the company that's developing the platform.

[118] What were your hooks for that?

[119] So, you know, we had done multiple acquisitions before we started the Xbox when I was running a PC business.

[120] Probably the biggest one is a company called FASA that did Mac Warrior and Shatter, all those.

[121] But we never went out with a goal of acquiring a company.

[122] Our goal was to find the best game developers in the world and support them whatever way was best for them.

[123] Okay.

[124] Whether it was publishing or acquisition or...

[125] And so in this case, the developer was calling and saying, we're running out of money.

[126] Bungy at that time was a developer slash publisher.

[127] They did bowl.

[128] And that 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.

[129] I mean, to try to knock on the door of a Walmart and that kind of thing.

[130] Probably especially as the world was shifting the console, right?

[131] Yeah, exactly.

[132] So in their case, they were both a developer and a publisher, and were finding that that just wasn't going to work out anymore.

[133] And so that's what started the conversation.

[134] Then I got a chance to see Halo, basically, to see that trailer that they showed it at Macworld and I knew that this is something I really hoped I could get for us, you know, as part of our lineup.

[135] Did you or anybody else at Microsoft have any qualms about acquiring a company that was mostly a Mac developer at that point?

[136] Or was it just all about the content?

[137] No, I didn't care about the Mac thing at all, honestly.

[138] I mean, they had done myth versions of their games.

[139] I'm sorry, they did PC versions of their games, like a PC.

[140] versions of myth, for example.

[141] So I knew that they could do PC versions.

[142] And the Xbox, especially in the early days, Xbox was thought of basically as a PC disguised as a console.

[143] So I wasn't worried about them having the technical ability to do it.

[144] They were always working on Halo for Mac before.

[145] Did you have to like tear it all down and re -architectedict it for PC and then do a PC port to Mac later?

[146] Or how much of Halo was already done when you had acquired it?

[147] None, basically.

[148] Which is funny, because if you watch the Mac World 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.

[149] Yeah, and it's got these wild animals running around and stuff.

[150] And what I loved is they don't actually show 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 Matt 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 the thing was I wanted Halo right and and I wanted the development team that was working on HALO I basically wanted all the all the developers in the company and so I but take two already owned part of the company.

[151] So I had to call up the head of Take 2, which is a guy named Ryan Brandt.

[152] And we kind of had to work out between the two of us how to split the company into two pieces.

[153] And so Bungy was developing two titles at that time.

[154] They were right.

[155] Oni, right?

[156] Yeah, Oni was the other game.

[157] Very good.

[158] So Bungee had two teams, one in Chicago and one down in California.

[159] And the California team was doing Oni and the Chicago team was doing Halo.

[160] And so basically the deal I struck with Ryan was that he would get ownership of all the back catalogs.

[161] So all the intellectual property for all the bungee titles that had been published so far, plus we would finish ONI for them and ship ONI.

[162] And then the ONI developers, once it was done, would move to Redmond and become part of our team.

[163] And the Chicago guys would come as well.

[164] So basically, all I got was the Halo IP plus all the developers.

[165] And he got.

[166] Oni and the back catalog.

[167] And then between the two of us, we acquired the company, basically.

[168] And some people think I got the better part of that deal.

[169] I don't know.

[170] 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 what you walked away with.

[171] Yeah, and Ryan was great to work with, and he and I did deals after that.

[172] I don't think there were any hard feelings among any of the parties involved in.

[173] the deal so cool you know one thing that that i just totally lit up when i was reading about this last night you got a couple of pretty interesting phone calls after uh after the deal was announced yeah well uh i you know when i when i did the deal i didn't even think about it but um yeah apparently jobs was not happy steve jobs was not happy and so um i don't know a few weeks later once once the deal was announced, I got mail from Steve Balmer or got a call from Balmer or something.

[174] And it just said Steve Jobs is mad about that you acquired Bungy call him and try to calm him down or something like that.

[175] They had this phone number.

[176] And I'm like, Steve Jobs' phone number.

[177] Sounds like, here's a noose, go hang yourself.

[178] I'm like, okay, they can do this.

[179] So, you know, so I dialed the number.

[180] How long does it take you to work up the nerve to dial those?

[181] Not very long, but I had an idea, which was good, which I'll explain in a minute.

[182] So I didn't just call with no idea.

[183] I called with an idea.

[184] And here's the thing.

[185] You know, the irony of the whole thing was the whole deal started when Peter Tampi, the bizdev guy from Bungi called me. But when we acquired the company, we had room for everybody but him.

[186] We didn't have a job for him.

[187] And so I felt really bad that he, you know, who's like the one guy out of the acquisition who ended up without a job?

[188] But he had told me that he was, he wanted to start a Mac porting company.

[189] And anyway, so I had, so that was in my head.

[190] And so when I got this mail that, you know, I'm supposed to call jobs.

[191] I kind of put two and two together.

[192] And so I call Steve and I say, you know, hey, sorry, I'm the guy who bought a Bunchy.

[193] But we want to do a Mac version of Halo.

[194] And actually, I want to do a lot of other Mac games.

[195] You know, I don't have anything against the Mac.

[196] I worked on Mac Excel.

[197] I worked on Mac Word.

[198] You know, we have age vampires and all this other intellectual property from our PC gaming business.

[199] And we would love to bring that to the Mac as well.

[200] And I know just the guy to do it.

[201] There's this guy Peter Tampy, ex -Pungy guy.

[202] He wants to start a company to take a bunch of PC games to the Macintosh.

[203] And Steve Jobs is really friendly on the phone.

[204] He said, that sounds great.

[205] Here, let me give you a guy on my team.

[206] And he assigned me to somebody on his team to work out the deal.

[207] and it was a very short conversation and a friendly one.

[208] So it was good.

[209] So all of a sudden I had, you know, had this deal for Peter Tampty.

[210] Apple agreed to fund the creation of his new company, which was really cool.

[211] So he had someone to fund his new company.

[212] And we were going to get to pour a bunch of our games to the Mac.

[213] Maybe we'd make some money on that.

[214] So it felt like a real win.

[215] There was just one, there was just one.

[216] requirement from Apple, and that was that Alex Seropian and I show up to the next Mac world and be on stage with Steve Jobs to announce this new partnership.

[217] So, I mean, I was a little nervous about being a Microsoft guy going on stage in front of like 10 ,000 Mac people.

[218] Well, Bill Gates had done it before, so.

[219] in very dramatic fashion.

[220] But I'm like, yeah, if that's what it takes to get the deal done, sure, I'll do it.

[221] So we agree, and, you know, a few months go by, and then it's time for Macworld.

[222] And so Alex and I get on a plane and we fly to New York and driving in from the airport in a cab.

[223] And I remember the phone rings, because we're going in, we had just landed, and we were supposed to rehearse that afternoon.

[224] And then the event was the next morning.

[225] and phone rings and it's one of Steve Jobs handlers and they say rehearsal's really not going well Steve's really upset with how everything is we really don't want you guys to come in go and check into your hotel and we'll call you we'll call you after dinner.

[226] I'm like okay so Alex and I go we check in we're waiting.

[227] The phone rings maybe 7 o 'clock at night and they say it's still really going badly jobs is really mad why don't you guys just coming 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 we'll just brief you right before you go on stage okay so we get no rehearsal we're going to go stand in front of 10 ,000 people and we're going to say something for a minute or so it's okay so we show up the next morning and just before it starts Steve Job 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.

[228] You know, like, okay, we got this.

[229] So that's what we did.

[230] So you guys basically got to wing it on stage in Macworld.

[231] I haven't seen the video.

[232] I wonder how mad it was.

[233] But I tell you, I mean, so those were my only encounters ever in my life with Steve Jobs.

[234] So, I mean, it was always, he was always very friendly to me, the both times I talked to him on the phone or in person.

[235] And he did an amazing job.

[236] I mean, sitting in the front row of the Macworld, watching him, you know, just take the audience and just hold their attention, you know, was incredible to see.

[237] It was really fun to be part of.

[238] 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 still come into the Mac take two gets Oni you get a great launch title for the Xbox coming out the next year and and then Halo launches and we should you know we'll we'll dive into so many questions about that but 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.

[239] It 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 of $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 game stop to go by Halo 2 at midnight.

[240] It was incredible.

[241] Yeah, yeah.

[242] I think I was up for 24 hours.

[243] I mean, just the sheer amount of Mountain Dew and Cheetos.

[244] And so Halo 2 ends up 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.

[245] really it was an incredible moment for video games and technology in general and and then the kind of the rest of well I would say the rest of the story is history we would love to bring Ed back in and you know the bungee story takes a few interesting turns along the way but but first Ed I mean when you were you were desperate you needed content for the launch could you ever you knew Hill it was good but did you think it was going to be like this I hoped it would be.

[246] I mean, I have to tell you that, you know, I wish the ride on the inside was as smooth as the one you paint on the outside.

[247] It was a straight line, right?

[248] I mean, I mean, the bunch of guys were always incredible to work with, super talented.

[249] It was clear from as soon as we got them in that this was an amazing group of people.

[250] But a little quirky, too.

[251] I mean, you know, like Microsoft, just quirky from a Microsoft point of view, like Microsoft, everybody has, you know, private offices with a door that can shut.

[252] And that's like the selling point of going to Microsoft, or at least it was back in the day.

[253] You got your own private office.

[254] 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.

[255] And it was all, you know, brand new private offices from one end to the other.

[256] And they looked at me and they said, we hate this.

[257] I said, what do you mean?

[258] They're like, we want all these walls torn out, and we just want a big, open bay.

[259] And I'm like, like, with cubicles, you know, like that was like the lowest status thing you could have at Microsoft, you know.

[260] And they're like, yeah, yeah, we want cubicles with really low walls.

[261] And I'm like, oh, you're kidding me. Like, I wish I knew this a few months ago.

[262] So facilities literally had to tear the walls out of this place.

[263] So the acquisition price, you know, never before disclosed.

[264] Bungy was whatever you paid for Bungy, plus all the two remodels you did to buildings.

[265] I mean, the great thing about, you know, working a big company like Microsoft when it came to acquisitions, the corp dev people were so incredible, the HR people were so incredible.

[266] You know, somebody like me who ran a business could just basically say, make this happen, and it would happen, you know, and they would deal with so many details and so many difficult, difficult things and facilities people as well.

[267] It's like make these walls go away.

[268] The walls would go away like magic.

[269] But so that was one thing.

[270] So we tore out all the walls and gave them the space that they wanted.

[271] But, you know, every Microsoft team has a test team that supports them.

[272] And it's a really important part of Microsoft culture.

[273] And they didn't want testing.

[274] They're like, we don't want tests.

[275] We don't need testing.

[276] And I'm like, yeah, you do.

[277] You really need a group of testers.

[278] This is the way we build software on Microsoft.

[279] Did all the engineers just test their own code?

[280] Or they trade testing responsibility around?

[281] You know, it's pretty typical in the game business, especially back then.

[282] You know, it's like they thought of testers as, you know, a bunch of high school kids, but, you know, not professional all testers like we had at Microsoft.

[283] And so, oh, the other thing the bunch you guys wanted was they wanted secure access to their area.

[284] They wanted, the only bungee people, and I suppose me and a few other people could get into their area.

[285] So they had these doors that needed card key access to get into.

[286] And so, anyway, they didn't want the test team.

[287] I'm like, fine.

[288] I'm going to give you a test team and I'm going to park them right outside your secure doors.

[289] Okay?

[290] So they're going to sit right outside your doors.

[291] And what happened was, that test team was run by a guy named Harold Ryan.

[292] And And the test team really proved themselves to Bungee over the period of that first Halo.

[293] They showed them what a group of professional testers can really do.

[294] And like an example is they built a giant render farm out of a big pile of Xboxes.

[295] 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.

[296] So, you know, so the next, between Halo 1 and Halo 2, they moved that wall.

[297] secure wall to the east 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 and you still even even with the addition of testers I mean one of the things that I think is so incredible about bungee is later on in bungee's history in in 2007 it ends up getting re -spun out from Microsoft and when that happened there are only 120 people working there I think including the testers do you know who the president of bungee is right now?

[298] Harold Ryan.

[299] Oh, really?

[300] How about that?

[301] That's awesome.

[302] Embracing testing.

[303] So anyway, so that's a story for you.

[304] When we first started showing Halo around to the game press, there was a lot of skepticism.

[305] They were wary about Microsoft entering the console business to begin with.

[306] They thought we really didn't understand console games, which was true.

[307] And then we're really excited to show them a first -person shooter, which is a PC genre, you know, looks like a PC game.

[308] And they're like, you know, this isn't Mario.

[309] This isn't Sonic.

[310] You know, this is just proof you guys don't get it.

[311] So we got a lot of pushback from the press, actually.

[312] E3, 2001.

[313] We only had half -speed graphics cards in the machines that we had at that time.

[314] And so it didn't show that well in the show floor.

[315] There was more kind of rumbling in the press.

[316] There's Penny Arcade comics from that time where the Penny Arcade guys are really down on the game.

[317] I don't know if I can swear on your podcast, but one of them just says Halo is shit.

[318] And so coming into launch, it was very unclear whether Halo was going to be our hit title.

[319] 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?

[320] Because this seems amazing.

[321] But we're kind of all PC gamers, you know, and we're going, well, maybe we're drinking our own Kool -Aid here.

[322] You know, maybe console gamers won't want this kind of a game.

[323] 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?

[324] or did that sort of organically fall out after you released?

[325] No, absolutely, we did.

[326] We, you know, because we had a certain marketing budget and probably the biggest thing we had to decide was which titles were going to get TV.

[327] And the TV budgets, you know, we could afford to do TV for just a couple titles.

[328] And so Odd World and Halo ended up getting basically equal treatment at launch with big TV campaigns from us.

[329] And, you know, Odd World was kind of our, well, this is a developer, is known to console world.

[330] I should say the game was called Munch's Odyssey, Oddworld's and Company.

[331] But, you know, so that and then Halo, and that's kind of the way we're sort of not sure, you know, which of these games is going to do best for us.

[332] Yeah, still not sure.

[333] In sort of that like early launch stage like that, how do you know and how fast do you know which of those two is going to be?

[334] Well, once things start to sell and, you know, reviewers get their hands on it, it becomes clear really quickly.

[335] But especially back in those days, there were a lot of things that had a lot of lag when it came to marketing.

[336] So, you know, anything that was in print, for example, you know, it was maybe a three -month delay.

[337] If you wanted to be in mailers, or not mailers, but like, say like a Christmas catalog that gets inserted and insert into.

[338] newspapers and stuff like that, magazines.

[339] It was all like three months or four months.

[340] So we always had to commit to the marketing team three or four months in advance when a game was going to ship.

[341] 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?

[342] So that was always built into our development process.

[343] But it's not like today where information just goes, boom out there right away and you can make changes right away.

[344] I mean, there was actually stuff printed with ink, you know, and sat in what houses?

[345] Yeah, hard to imagine.

[346] What, 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 Bungy and Halo and our very first episode we did Pixar, of just contenting creativity, there also is a huge element of technology in Halo and Bungee and new technology.

[347] And I'm curious from your guys' perspective, to me, the story that I write in my head is, you know, the single -player experience of Halo is good.

[348] It's great.

[349] I'd buy the game.

[350] I'd play it.

[351] But what made Halo was multiplayer and networked multiplayer.

[352] Yeah, I remember buying a router specific.

[353] 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, four Xbox Live.

[354] So the only way to do that...

[355] I think every high school kid in America did that at the time.

[356] That's exactly right.

[357] I mean, it was one of the only games that you could do that because Xbox Live didn't come out for a year later, right?

[358] And so people came up with all kinds of...

[359] I remember you could hook your Xbox to a PC and then people would do the...

[360] And then do these PC connections over the internet, yeah.

[361] 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 the, to my mind, that first real AAA style, fully realized experience of what playing with other people and your friends anytime you wanted.

[362] Yeah, so, I mean, a few things.

[363] It's amazing how much that team accomplished in less than two years.

[364] I mean, that is not very much time in the game business.

[365] And, you know, not only did they have the single player, but they had multiplayer, but they also had split screen multiplayer, they had network multiplayer.

[366] They also had split screen co -op play, which you don't even have split -screen co -op play in Halo 5 that just slipped their ships.

[367] Yeah, controversially.

[368] So, 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 Halo, or helping them develop Xbox Live and develop how games would work on Xbox Live, that was a big thing for the Halo team.

[369] They worked really closely with the Xbox Live.

[370] Tons of Halo fans on the Xbox Live side, so they really wanted to work with a bunch of guys.

[371] And, you know, it was a very mutual respect experience there.

[372] You know, the problem is Halo wasn't due for, you know, a few more years.

[373] Halo 2 wasn't due for a few more years, and I can talk a little about that of what happened there.

[374] 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.

[375] FASA team that I mentioned earlier.

[376] And it was a MEC commander was the first one.

[377] But anyway, meanwhile, the Bungi guys go off after shipping HALA 1 and a couple things happen.

[378] Jason Jones, who's just the creative genius behind everything Bungy, decides he's going to leave the HALO team and start a new project.

[379] And so he in a small group go off on the side and they start to work.

[380] on this new project.

[381] Meanwhile, the HALO guys, the main HALO team starts working on Halo 2.

[382] And they get a couple years into it and it's kind of going off the rails without Jason running it.

[383] So Jason comes back and he looks at it and this is about a year before we're supposed to ship.

[384] And he's very unhappy with it.

[385] 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 in Halo 2 you know for me it was like this nightmare you know it'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 read us a whole big part of Halo 2 but in order to do it he needs a whole other year.

[386] So instead of being out in 2003, it's going to be out in 2004.

[387] And 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.

[388] Anyway, it's not my favorite memories.

[389] I'm glad you liked the game when it came out.

[390] 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.

[391] it's so, so interesting.

[392] David and I were talking before this about a parallel to a previous episode.

[393] Actually, our first one is Disney acquiring Pixar.

[394] And in, 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.

[395] And one of the things that makes that process work is the ability to have that honest conversation internally.

[396] the mechanisms by which you fix things when you're off the rails.

[397] 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.

[398] Toy Story 2.

[399] No, Toy Story 1 was the original.

[400] I'm pretty sure.

[401] Yeah, I think I've read this too, yeah.

[402] Where Woody was me. Yeah.

[403] And they were screening as far as they had gotten, and it wasn't fully rendered and fully realized, but they had to change the story and rip a part of much of storyboard 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 up I know I know you don't really want to see how this stuff is made on the inside you know this game is awesome it's all magic and wonder same thing in regular startups too exactly what I don't want to dwell on this for too long because it's not a super core part of the story.

[404] And you had left Microsoft by this point.

[405] But, you know, I was, 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.

[406] And then Halo 3 even eclipsed that and helped launch the Xbox 360.

[407] But then after Halo 3, Bungie spins out of Microsoft.

[408] And you were gone, so you may not know.

[409] But to the extent you do, how?

[410] and why did that happen?

[411] Microsoft ended up retaining a stake in Bungee, and Bungee kept working on Halo through Reach and ODST.

[412] But how did that happen?

[413] Okay, so I'm going to tell you what I understand about the story.

[414] And, you know, everything up until now, I've talked about stuff I was directly involved with.

[415] Now, it's more like things I've heard.

[416] So I apologize and advance to anyone if I get something not quite right here, but after Halo 2 shipped, there was a disagreement about royalties.

[417] There was some kind of royalty agreement between the person who followed me and the guys at Bungee.

[418] And after Halo 2 shipped, the bungee guys felt like that deal was not followed the way they thought it should be.

[419] And they decided they would be better off separate as a separate company again and part of Microsoft and they went into negotiations 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 thought they were free to go, basically.

[420] And so they entered into an agreement to do that.

[421] And I think those titles were Halo 3, Halo ODST, and Halo Reach.

[422] And so after they finished Halo Reach, they went on to do their new game, Destiny.

[423] Destiny.

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[444] 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 things is a gigantic multiple of, um, the two parts and they're separate.

[445] It's kind of a one plus one equals three thing.

[446] Yeah.

[447] What characteristics, you know, what actions and what things transpired that made this so successful?

[448] Well, I think, you know, most game developers pretty much feel the same, which is like, I just want to make an incredible game.

[449] You know, I want to have the resources to make the game that I have in my head, you know.

[450] And then I want to see it have an honest chance to read.

[451] reach its market, right?

[452] To reach as many people as possible.

[453] So, you know, if you think about trying to do that as a little struggling independent company like Bungy 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 marketing budget and it's going to, you know, make a lot of noise about this new platform.

[454] I mean, that's, that's a big opportunity for someone to have, you know, have a have their ideas and their, you know, their creativity right along with that, with that big push.

[455] So that's, I think, what's in it for a game developer to want to want to team up and be part of, part of this bigger thing.

[456] I think the challenge along the way is, you know, and this is something we always, you know, 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.

[457] Like, you know, that's what you should hear when I'm saying.

[458] Bungi wanted to rip out the walls because they worked super collaboratively as a team.

[459] They wanted the programmers and the artists to be able to just shout to each other across this room, you know.

[460] And by the way, if you go to visit Bungi's office now, it's in this giant, well, it used to be a movie theater, and it's a giant bay.

[461] it's still completely open because that's part of their culture.

[462] 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?

[463] I think that's really the challenge of management that's running something like that.

[464] Yeah, and there's obviously attention you have to manage there between, you know, efficiencies of the larger business and respecting the culture of the smaller.

[465] Did you struggle at all with the decision to move them to redness?

[466] didn't, but in retrospect, I probably wouldn't have done it later.

[467] We went through multiple other acquisitions over time, and, you know, I think, I think the more you can do to preserve the culture of the company, the better, because I think that's really what makes them unique, and that uniqueness, at least in the entertainment world, is really important.

[468] You know, it expresses itself in the product itself.

[469] So, you know, I like to talk about how, you know, I had these two really great teams who worked for me. One was called Ensemble Studios, and they did the Age of Empire series down in Texas, and another, you know, the Bungy team.

[470] And if you looked at the cultures of those two companies, they were almost diametrically opposed.

[471] Like if you wrote their values down, you know, there would be like opposite lists, you know.

[472] Like Bungi would be like, we're hardcore, you know.

[473] And ensemble would be, we're a family, you know, I don't know, stuff like that.

[474] It would just be really different.

[475] And that kind of taught me that it's not, there isn't like a culture that works, you know.

[476] It's like having a culture is what matters.

[477] It's not which culture you have that matters, you know.

[478] Having a strong culture that attracts, you know, specific people that fit within that culture.

[479] and really enforcing it and really making it, you know, that culture ends up just expressing itself in the product.

[480] I don't know how else to say it.

[481] It's so cool to hear you say that because that's such a, been a core theme of our whole show and part of the reason we decided to do this.

[482] Oh, good.

[483] I haven't heard any other episodes.

[484] Yeah, well, you know, we talked about Pixar, we've done Instagram and we've done Twitch.

[485] And all of those were 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.

[486] And they've all thrived hugely.

[487] And for us, I think a big takeaway has been the importance of doing that.

[488] When you have a great culture, that's when great things get created.

[489] Yeah, I mean, I think one of the things was we were able to bring those two bunchy teams together, though.

[490] you know the Chicago team and the California team together in one spot and 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 I had gone through a process of integrating marketing into my game team when I was doing PC gaming business.

[491] And even though the marketing guys didn't technically report to me, they were integrated and sitting with my teams all through the organization.

[492] And then after Xbox came along, there was all of a sudden this kind of bigger Xbox organization.

[493] And the head of the Xbox marketing wanted to have all his marketing people under him sitting in his building.

[494] So they all got pulled out.

[495] And I think it was a really bad decision because, you know, they really got separated from the teams.

[496] And all of a sudden, it was sort of an us and them kind of thing rather than that we're all working together.

[497] We do different functions, but we're all trying to do the same thing.

[498] I mean, an example of that would be the first TV ads came back from the agency for Halo, and we showed them to the bunch of guys, and they hated them.

[499] They really, really hated them.

[500] There's a guy running around with a gun and he's shooting stuff.

[501] And you might think, oh, that's what Halo is about.

[502] To the bungee guys, that is not what Halo is about at all.

[503] For them, Halo is like the quiet before the storm.

[504] It's that epic long vista that you see and realize you're going to be heading there later.

[505] It's the original theme music.

[506] Yeah, it's the music.

[507] It's all that.

[508] So we had to, like, way back and try to fix this, you know, TV commercial.

[509] But that's the kind of stuff that happened when, you know, when there isn't this integrated team working together all the way through so that they really understand the vision for the product.

[510] Yeah, it's so interesting thinking about just for my time at Microsoft when we kind of had the one Microsoft reorg and went functional from divisional.

[511] And where's the appropriate place in the hierarchy to separate into divisions versus functions?

[512] 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 versus, you know, having these sort of family units of these separate divisions where everyone's totally integrated.

[513] Right.

[514] 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.

[515] You know, I was at Microsoft 18 times, 18 years.

[516] I mean, so I don't know how many times I saw that org that reorg happened.

[517] and back one way and then back the other and back one way and back the other.

[518] It's like the grass is always greener, you know.

[519] It's like one way has a certain set of problems and the other way has a different set of problems.

[520] And so it seems like they just toggle back and forth between the two.

[521] I don't really understand it.

[522] Well, one of the things we do on our show that we really enjoy doing is three segments in particular that we can run through quickly And Ed, we'd love you to participate, too.

[523] The first is that Ben and I each assign a category to the acquisition.

[524] 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 four, the fifth is other wildcard.

[525] But yeah, you know, for me, it's interesting.

[526] I have really pegged Halo and Bungee as a product acquisition for Microsoft.

[527] 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.

[528] Ultimately, I think I'm going to stick with product simply because more than anything, you know, because of the spin -out that ended up happening later on in Bungee going on to leave Microsoft and that DNA to leave Microsoft.

[529] and Halo sticking behind as a product for Xbox?

[530] What would you say, Ben?

[531] I'm not going to disagree.

[532] I think it's absolutely that.

[533] Like you said, there's definitely a learning from the folks at Bungy 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.

[534] But, yeah, I think my vote would be product.

[535] Ed, what do you think?

[536] I'm sticking with the people for sure.

[537] I mean, you know, it's one thing to create a franchise and it's another to continue it is one thing I'd say, you know.

[538] And these are the people that created Halo, you know, out of nothing.

[539] And so, you know, it's true there's a different team that's moving Halo forward now.

[540] And they've added a lot of interesting new things to the franchise, but Bungi created it.

[541] And then they created destiny, which I also think is very good.

[542] So I don't know.

[543] I just always fall on the side of the people like that are in these companies.

[544] Well, one of the pieces of feedback we've gotten is we need more disagreement on this show.

[545] So this is great.

[546] We're going to bring people in like you have to disagree with us.

[547] You're welcome back anytime.

[548] If David and I keep agreeing, we'll just bring in third parties that can gang up on us.

[549] Yeah.

[550] Okay.

[551] Okay.

[552] Second to last segment.

[553] This is my favorite.

[554] We talk about, because this is about technology acquisitions as a whole of this show, we talk about is there an underlying kind of generalizable and broader theme in technology that this acquisition embodies or represents.

[555] For me, and this is why I thought destiny was a great seg, you know, for me, the bungee 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 Xbox and PlayStation 2 and and and and and and and and and and Bungy rode that success and And then, you know, in recent times, there's has been the age of free to play, the two, the simultaneous age of free to play in mobile.

[556] And it's interesting to see, you know, Halo is still a huge part of the cultural landscape, but at least in, you know, the media landscape in the U .S., but the gaming industry, you know, has been, has moved on in a lot of ways.

[557] And what's, what's big now are companies enabled by this next wave.

[558] And that's where Bungy's gone with destiny.

[559] 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 winners and bigger winners.

[560] I think HALO and Bungy represent that really well.

[561] Yeah, I'm going to, I mean, I see it maybe a little differently, but I'll pick the same milestones as you, you know.

[562] For me, it was the time when, you know, the Bungy acquisition happened at the time when the publishers were getting bigger and there was consolidation among the publishers.

[563] So it was getting this, there was this economy of scale of being big at that time.

[564] You know, and that Activisions and Electronic Arts and Take Twos and Microsofts had an advantage.

[565] And the little kind of mom and pop developer publisher was going away.

[566] Bungie is an example.

[567] Another acquisition we did was a company called Access Software that did our golf and tennis and other games.

[568] And so these things start small and then they get somewhat bigger.

[569] And then at some point, you know, economy of scale really matters.

[570] Scale really matters.

[571] And then you start to see a lot of acquisitions.

[572] And so that was what was happening kind of in the, you know, around 2000 when this bungee acquisition happened it's also what's happening now in free to play so follow on your example you know i mean i you know i was on the board of z2 the two 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 skill started to really matter and free -to -play.

[573] You know, if you're going to compete with, you know, Clash of Clans or Candy Crush or something, you know, just these massive audiences and you really want to drive traffic to your game, it really matters if you have this big audience out there.

[574] And so it was getting harder and harder for Z2 to compete.

[575] And, you know, just like Microsoft Bob Bungee, it made a lot of sense for King to buy Z2.

[576] So I think, you know, there's kind of cycles to the stuff, and we see it, you know, over and over again.

[577] You know, maybe it's not just one platform shift.

[578] Maybe it's, you know, just a natural evolution of each market, right, as some new market comes.

[579] You have a lot of little guys at the beginning, a lot of experimenters, and then change over time.

[580] And with that, I'll kind of take us into our last section where we render a conclusion.

[581] Grades A through F, you get pluses and minuses.

[582] 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 Bungy team and your team didn't pull off this acquisition?

[583] I really don't.

[584] I think HALO was hugely important to the success of Xbox.

[585] I don't know if there would have been at Xbox 360 if there was no Halo with Xbox.

[586] So I think it was incredibly important.

[587] famously, Microsoft criticized for years and years and years of not making money on Xbox and not being something the company was serious about.

[588] And then, you know, where we see where it's gone today and kind of being part of the same platform as Windows and doing so much more than gaming and the company really taking the whole thing seriously and combined with the HoloLens and a lot of other future bets they're making.

[589] Minecraft, future episode.

[590] Yep, yep.

[591] Really paving the way for the future of the company.

[592] So it's pretty amazing to hear how important it was to the creation of the platform.

[593] When I went to work on games in the mid -nibis, I was leaving a successful career in office.

[594] I'd been there in 10 years.

[595] And I was told a couple things.

[596] I was told that I was committing career suicide.

[597] 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?

[598] That was a great motivator for me to go make.

[599] games be an important part of Microsoft and so 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 Christensen but like boy does that sound like low in disruption even in your career right you're 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 and it's the Titan that's been trucking along forever.

[600] It's just so reminiscent of every, you know, 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.

[601] Well, as, you know, I'll just say it's fun to be part of that, you know?

[602] Yeah.

[603] Yeah.

[604] All right, well, A plus.

[605] I showed my car.

[606] Yeah.

[607] Um, yeah.

[608] Talk about the ledge, David.

[609] This is, uh, So we'll let Ed go last here.

[610] You know, I've been struggling with this one, and not just for creating disagreement for the sake of the show.

[611] But this acquisition, really any perspective you look at it, you know, and that one that Ben, you and Ed were just talking about, is such a powerful one.

[612] Look at it financially.

[613] I mean, over the lifetime of the Halo franchise, and there's no way anybody could have foreseen this at the time.

[614] But it's made over $5 billion in revenue.

[615] just from game sales alone.

[616] That's before merchandise.

[617] That's before movies.

[618] That's before Machinima, which was a whole other category that Halo really helps launch, although Microsoft didn't monetize by it.

[619] So really any dimension you look at it, it's an incredible acquisition.

[620] The thing that I struggle with a little bit, I come back to the spinoff, and I think about both Halo and both Halo and And Xbox and Bungee, what all three of them could have been if that creative team had really continued being a central part of Xbox and gaming going forward.

[621] And for many years, you know, while mobile was rising and while free to play was rising, HALA wasn't part of it.

[622] And I don't know.

[623] I think about what it could have been.

[624] So obviously it's really great acquisition.

[625] I think I remove the plus because of that.

[626] So it's an A for me. So wait, your argument is that...

[627] I argue that there's some unrealized potential here.

[628] Nothing against you, A. Yeah.

[629] Do you think it's...

[630] Because it's fun out.

[631] You're saying because they lost it again.

[632] Yeah.

[633] Yeah, in 2007, which ended up being...

[634] It was the very top of the console market, or at least close to it, before the next wave was coming.

[635] And right then, Microsoft lost...

[636] Bunchy.

[637] So are you blaming the Microsoft missing mobile on Windows phone is a direct result of the Bungy spin out then?

[638] Well, even mobile gaming, right?

[639] Like Microsoft never had a, you know, they had this incredible presence in console gaming.

[640] And like when I'm sitting there screwing around on my phone playing Clash of Clans or whatever, like it's not a Microsoft property.

[641] Do you think that there's like unrealized potential if that team had stuck there that they?

[642] I don't know.

[643] know, maybe not.

[644] And maybe, maybe, maybe even Destiny never would have happened within Microsoft.

[645] So, I don't know.

[646] But I look at Halo today and I think, and maybe it's just the natural course of things, but it's not as culturally relevant as it once was and not as relevant to video gaming as a whole as it once was.

[647] Okay, well, a few things.

[648] Microsoft had a right for strefusal on Destiny, so they could have, they could have published it if they wanted to.

[649] So, um, whether they made the right choice on that or not I guess time will tell but that's just one thing to think about 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 bungee so I'm not going to give myself an A plus but I'll get myself yeah you're grading yourself here I'll go with A because this was the number one, one that I was involved with.

[650] Sounds good to me. And, you know, it's kind of funny, like, 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.

[651] Sure.

[652] Yeah.

[653] Thank you, Ed.

[654] We really appreciate all the time.

[655] A super special treat, both for us and our listeners.

[656] And like I said, you're welcome back anytime to disagree with us.

[657] Thanks a lot.

[658] It was really fun.

[659] to be part of this.

[660] Yeah, we appreciate it.

[661] And for listeners, we are Acquired FM on Twitter.

[662] Yeah, sorry this one went so long, but I just got real into it.

[663] So many great moments.

[664] Thanks again.

[665] Good easy, guys.

[666] Who got the truth?

[667] Is it you?

[668] Is it you?

[669] Is it you?

[670] Who got the truth now?

[671] Our sponsor for this episode is a brand new one for us.

[672] Statsig.

[673] So many of you reached out to them after hearing their CEO, Vijay, on ACQ2 that we are partnering with them as a sponsor of Acquired.

[674] Yeah, for those of you who haven't listened, Vijay's story is amazing.

[675] Before founding Statsig, Vijay spent 10 years at Facebook where he led the development of their mobile app ad product, which, as you all know, went on to become a huge part of their business.

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[698] And when you do, just tell them that you heard about them from Ben and David here on Acquired.

[699] Thank you.