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Mon, 30 Nov 2015 17:00
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:
Our presenting sponsor for this episode is not a sponsor but another podcast that we love and want to recommend called the founders podcast. We have seen dozens of tweets that say something like my favorite podcast is acquired and founder so we knew there's a natural fit. We know the host of founders well David Senra. Hi David. Hey, Ben. Hey, David. Thank you for joining us. Thank you for having me. I like how they group us together and then they say it's like the best curriculum for founders and executives. It really is we use your show for research a lot. I listened to your episode of the story of Akyo Marina before we did our Sony episodes this incredible primer. You know, he's actually a good example of why people listen to founders until acquired because all of history's greatest entrepreneurs and investors they had deep historical knowledge about the work that came before them. So like the founder of Sony, who did he influence? Steve Jobs talked about him over and over again if you do the research to him. But I think this is one of the reasons why people love both of our shows and there's such good compliments is on acquired. We focus on company histories. You tell the histories of the individual people. You're the people version of acquired and where the company version of founders listeners. The other fun thing to note is David will hit a topic from a bunch of different angles. So I just listened to an episode on Edwin Land from a biography that David did David. It was the third fourth time you've done Polaroid. I've read five biographies of Edwin Land and I think I've made eight episodes of them because in my opinion, the greatest such a puner to ever do it, my favorite entrepreneur personally is Steve Jobs. And if you go back and listen to like a 20 year old Steve Jobs, he's talking about Edwin Land's my hero. So the reason I did that is because I want to find out like I have my heroes who were their heroes and the beauty of this is the people may die, but the ideas never do. And so Edwin Land had passed away way before the apex of Apple, but Steve was still able to use those ideas. And now he's gone and we can use those ideas. And so I think what requires doing what a founder trying to do as well is find the best ideas in history and push them down to generations. Make sure they're not lost history. I love that. Well listeners, go check out the founders podcast after this episode. You can search for it in any podcast player. Lots of companies that David covers that we have yet to dive into here on acquired. So for more indulgence on companies and founders, go check it out. Hey guys, it's 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. Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Is it you? Is it you? Is it you? Sit me down. Say it straight. Another story on the way. Who got the truth? 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 Rosenfall. And we're here today to talk about the bungee 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 bungee. So we're very honored to have Ed with us today. He was at Microsoft from 1986 to 2004 led the acquisition of bungee 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 it all pros. David, do you want to do the acquisition history in fact? Yeah, so most people are probably familiar with bungee, 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 Minitar, 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 successful sequels and other projects that came out of that. Then you have a fun personal history with. Yeah, actually my dad was a reviewer for the Mac users of Delaware of Marathon in the real early days before it came out and then as the trilogy unfolded. And we actually, some of these pictures last night, we actually have the collector's edition box set of the Marathon trilogy for Mac. Pretty cool. And so that was bungee 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 and actually unveiled it at a Macworld keynote in the summer of 99 and 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 bungee 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. Tell us, take us back to, you know, it was 15 years ago now. How did it all happen? How did it come together? Of course, I was also a bungee game player. Even before I started running Microsoft's game business, I played a couple 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 and a meeting, you call 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, you know, 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 again, in Peter Tamte, who did Fisdev for bungee, who I got buttoned to know all the other previous few years. And he told me that bungee was in bad financial trouble. 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 bungee from a earlier transaction. And he wanted to see if I was interested. By the way, there's some debate about this point, because also John Kimick was also involved. So there's a, again, one of our product planners, John Kimick, his job was to go out and talk to lots of game companies. 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't matter. Peter called me, told me this stuff. And I said, yeah, I'm very interested. I mean, I really respect your work. And I'd love to hear what you guys are up to. And that was the start of it. Wow. And I mean, I got to imagine there were other, maybe 15 or 20 or so launch titles for the Xbox when it came out. So you guys did do partnerships and with other game developers out there. Was there something special about bungee or halo in particular? Or 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 it. Because 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. That 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, you know, we had signed a deal with long landing in its group Oddworld and Habitans. That was 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 games. So, in fact, there's a funny penny arcade comic from the time where we're learnings 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, what you've got a lot of different tools that you're disposal for coming and joining and working directly with and for the company that's developed in 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 PC business. Probably the biggest point is a company called FASSA that did Mac Warrior 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. I mean, whether it was publishing or acquisition. Exactly. And so, in this case, the developer was calling and saying, we're running out of money. Bungie at that time was a developer slash publisher. They did bull. 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. I mean, to try to knock on the door of a Walmart and that kind of thing. Probably especially as the world was shifting the console. Yeah, exactly. 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 the start of the conversation. Then I got a chance to see Halo, basically to see that trailer that they showed it at Macworld. And knew that this is something I really hoped I could get for us, you know, 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. I'm sorry, they did PC versions of their games like PC versions of myth, for example. 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, I wasn't worried about them having the technical ability to do it. They were always working 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 did how much of Halo was already done when you acquired it? No, basically. Which is funny because if you watch the Macworld trailer, I think it was Jason who presented it on stage. 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. What I loved is they don't actually show MasterTeper anyone else killing any covenant because I guess probably I could imagine Apple didn't want any deaths on stage at Macworld. Yeah, well, so we can talk about the development of it. Let me talk a little more about the deal first if you. That's okay. The thing was I wanted Halo, right? And I wanted the development team that was working on Halo. I basically wanted all the developers and the company. But take two already own part of the company. So, I had to call up the head of tape 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. Oh, me, right? Yeah, Oh, me 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 Oh, me and the Chicago team was doing doing Halo. And so basically the deal I stuck with Ryan was that he would get ownership of all the back catalogs. So, all the all the intellectual property for all the Bungie titles that had been published so far. Plus, we would finish Oh, me for them and ship Oh, and then the Oh, me 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 only in the back catalog. And that was 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 that you know, 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. Yeah. And Ryan was great to work with. And 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. So. Cool. You know, one thing that I just totally lit up when I was reading about this last night, you got a couple of pretty interesting phone calls after the deal was announced. Yeah. Well, you know, when I when I did the deal, I didn't even think about it. But, like, yeah, apparently jobs was not happy. Steve Jobs was not happy. And so, 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. And it just said Steve Jobs is mad about that you acquired Bungie, Colin and try to calm him down or something like that. And I had this phone number. And I'm like, Steve Jobs, it was over. So it sounds like he's a new school hang yourself. I'm like, okay, they can do this. So, you know, so dial the number. How long does it take you to work up the nerve to dial this? Very long. But I had an idea which was good. I would just explain it in a minute. So, I didn't just call with no idea. I called with an idea. And here's the thing. You know, the irony of the whole thing was the whole deal started when Peter Tampy, the Bistav 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, who's like the one guy out of the acquisition who ended up without a job. But he had told me that he wanted to start a Mac hoarding company. And anyway, so that was in my head. And so when I got this mail, you know, 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 my G. But we want to do a Mac version of Halo. And actually, I want to do a lot of other Mac games. You know, I don't have anything against the Mac. I worked on Mac Excel. I worked on Mac Word. You know, we have Age Vemp hires and all this other intellectual property from our PC gaming business. And we would love to bring that to the Mac as well. And I know just the guy to do it. There's this guy, Peter Tampy, X Bungie guy. He wants to start a company to take a bunch of PC games to the Mac and touch. And Steve Jobs is 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 I was very short conversation and a friendly one. So it was good. So all of a sudden, I had, you know, had this deal for Peter Tampy. 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 pull out a bunch of our games to the Mac. Maybe we'd make some money on that. So it felt like a real, a real win. There was just one 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. So I mean, I was a little nervous about being a Microsoft guy going on stage in front of like 10,000 Mac people. Well, Bill Gates had done it before. So in very dramatic fashion. 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 so Alex and I get on a plane and we fly to New York and driving in from the airport in a cab. And I remember 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 phone rings and it's one of Steve Jobs handlers and they say, rehearsals really not going well. Steve's really upset with how everything is. We're really don't want you guys to come in. Go 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 mad. Why don't you guys just come in 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're going to go out front of 10,000 people and we're going to say something for a minute or so. So okay. So 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 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. You know, like, okay, we got this. That's what we did. So you guys basically got to wing it. Don't. I haven't seen the video. But I tell you, I mean, so those are my only encounters ever in my life with Steve Jobs. So I mean, it was always he was very friendly to me the both full-time site document, you know, on the phone or in person. And he did an amazing job. I mean, sitting in the front row of the Mac world watching him, you know, just take the audience and just hold their attention. You know, it 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, get Sony. You get a great launch title for the Xbox coming out the next year. And then Halo launches. And we said, you know, 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 a, I believe, a 50% attach rate to all Xbox is sold within the first year of launch. It sells a million units in six months, six and a half million units over the lifetime of Halo, which would be estimate of there are no, no hard numbers out there, but kind of 200 to 300 million dollars in revenue just from the first Halo. But then it goes on and becomes this huge cultural phenomenon and a franchise, you know, I remember in 2004, when Halo 2 launched, I was a freshman in college and like people were organizing, organizing trips to the local, you know, game stop to go by Halo and Halo 2 and midnight. It was incredible. Yeah, yeah. I think I was up for 24 hours. I mean, just this year about a mountain due in Cheetos. 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 US 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 would 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 Halo was good, but did you think it was going to be like this? I hope it would be. I mean, I have to tell you that, you know, I wish the ride on the inside was as smooth as the one you painted on the outside. It was a straight line, right? I mean, I mean, the Bungie guys were always incredible to work with, super talented. It was clear from as soon as we got them in that this was an amazing group of people. But a little quirky too. 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 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 Bungie 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. They 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, I could cubicles, you know, like that was like the lowest status thing you could have at Microsoft. And they're like, yeah, yeah, we want cubicles with really low walls. 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 a Bungie was whatever you paid for Bungie. Plus all the two remodeled you did to buildings in the minute. 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. 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. 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 given the space that they wanted. But, you know, every Microsoft team has a test team that supports them and it's a really important part of Microsoft culture. And they didn't want testing. They're like, we don't want testing. We don't need testing. And I'm like, you do. 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 and they trade testing responsibility around? Yeah, that's pretty typical in the game business, especially back then. You know, it's like, they thought of testers as, you know, a bunch of high school kids, but, uh, but, you know, not professional testers like we had at Microsoft. And so, uh, oh, the other thing the bunch of guys wanted was they wanted secure access to their area. They wanted the only bungee people and I suppose me and a few other people could get into their area. So they had these doors that, you know, that were 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, 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 outside your doors. And what happened was that test team was run by a guy named Harold Ryan. And, um, and the test team really proved themselves to bungee over the period of that first halo. They, they showed them what a group of professional testers can really do. And like, like an example is they built a giant render farm out of a big pile of x boxes 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 one and halo two, they moved that wall. That secure wall to be the side of the testers. So that now the testers were part of the family. So, how's that, how's that for ten equals six and 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 2007, it ends up getting respawned 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? Harold Ryan. Oh, really about that. That's awesome. Embracing the testing. So anyway, um, so that's a story for you. Um, when when we first started showing halo around, uh, to the game press, um, there was a lot of skepticism. Um, they, you know, 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're really excited to show them a first-person shooter, which is a PC genre, you know, looks like a PC game. And um, 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. Um, so we got a lot of pushback from the press, actually. Um, E3 2001, uh, we, we only had half speed graphics cards in the, in the machines that we had at that time. And so it didn't show that well in the show floor. There was more kind of rumbling in the press. Um, there's, there's Penny Arcade comics from that time where the Penny Arcade guys are really down on the game. Um, I, 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? This seems amazing. Um, but we're kind of all PC gamers, you know, we're, well, maybe we're drinking our own cool 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, 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. We, you know, because we had a certain, uh, marketing budget and probably the biggest thing we had to decide was which titles were going to get TV. Um, and, and the TV budgets, you know, we could afford to do TV for it, just a couple titles. Um, and so, uh, OddWorld and Halo ended up getting, uh, basically equal treatment at launch with big TV campaigns from us. Um, and, you know, OddWorld was kind of our, well, this is a developer's known to console world, um, you know, I, I should say the game, the game was called Munch's Odyssey, uh, OddWorld's a company, but, um, you know, so that and then Halo, and that's kind of the way we're, we're sort of not sure, you know, which of these games is going to, it's going to do best. Yeah. Still not sure. If I'm first. In, in, in, 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? Well, one thing starts to sell and, you know, reviewers get their hands on it. It becomes, it becomes clear really quickly, but, especially back in, in those days, there were, there were a lot of things that, um, had a lot of lag when it came to marketing. So, you know, anything that was in print, for example, you know, it was maybe a three month delay. Uh, if you wanted to be in, um, in mailers, uh, 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? Um, so that was always, that was, that was always built into our development process. Um, but it's not like today where information just goes boom out there right away and you can make changes right away. Um, there was, I mean, there was actually stuff printed with ink, you know, sat in one house. It's, yeah. I do imagine. What, um, I'm curious, I really want to ask, especially because the whole theme of our show is thinking about technology and, um, while there's certainly a huge element of, you know, both bungee and halo and, and our very first episode we did Pixar, um, of just content and creativity, there also is a huge element of technology in halo and bungee and new technology. And I'm curious from your guys perspective, you know, to me, um, the story that I write in my head is, you know, the single player experience of halo is, is good. It's, great. I'd buy the game. I'd play it, but what made halo is multiplayer and, and network to multiplayer. Yeah. I remember buying a router specifically. Actually, no, I didn't buy the router because I went through my dad's old bin and got one, but, uh, doing a router and streaming four Xboxes together in my friends basement for Xbox Live. So the only way to do that, 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, we're, because Xbox Live didn't come out for a year later, right? And, uh, and so people came up with all kinds of, I remember you could hook your Xbox to a PC and then people would do them and then do these PC connections over the software. Yeah. But it was all like, yeah, handmade and, um, how much did you guys either a, well, both a think about that beforehand in terms of this incredible, uh, experience of playing with your friends, but then be, how much, how much did that shape the eventual launch of Xbox Live and Halo 2, you know, being the, to my mind, that first real triple A style, fully realized experience of what playing with other people and your friends anytime you want it could be. 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 a 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 co-op play, which you don't even have split screen co-op play in Halo 5, it just, yeah. Yeah, controversy. So, I mean, it was amazing what was in that first game, but yeah, um, after they shipped, um, Halo 1, then, um, working on, working with the Xbox Live team, um, helping them develop Halo, uh, or helping them develop Xbox Live, and develop how games would work on Xbox Live. That was, that was a big thing for the Halo team. They worked really closely with Xbox Live. Um, tons of Halo fans on the Xbox Live side. So, they really wanted to work with a bunch of you guys. Um, and, uh, you know, it was a very mutual respect experience there. You know, the pause, 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, um, what happened there. So, somebody reminded me of the other day that actually the first Xbox Live title that we launched, with our first party group was actually, oh, that, uh, that facet team that I mentioned earlier. And it was a, um, a mech commander, uh, was, was the first one. But anyway, meanwhile, the Bungie guys are go, go off after shipping Halo 1 and, and a couple of things happen. Jason Jones, who's, you know, just the creative genius behind everything Bungie, um, decides he's gonna, um, leave that, 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 2. Um, and they get, uh, a couple years into it. And it's kind of going off the rails with how Jason running it. Um, so Jason comes back and he looks at it and, uh, this is about a year before we're supposed to ship. And he's very unhappy with it. And, um, then the team has a lot of problems. They try 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 the Halo 2. You know, for me, it was like this night Mary. It was like Halo 2 with all screwed up, you know, and then, um, Jason comes back and he's like, I can fix this and he goes through and just like, you know, Reed does a whole big part of Halo 2. But in order to do it, he needs a whole another year. So it's kind of, instead of being out in 2003, it's gonna be out in 2004. And, uh, so I have to go to Robbie, my boss and tell him he's not gonna have Halo 2, 2012, 2004 and blah, blah. Anyway, that's not my favorite Mary Smith. I'm glad you liked the game when it came out. So, uh, so yeah, anyway, that was, uh, 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, now we're talking before this about a parallel to a previous episode. Actually, our first one is Disney Appliering Pixar. And in, you know, so many parallels because it's a, you know, a creative, hit space business where, um, you know, you're doing the, 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, you know, the story of Toy Story as it was being developed. Yeah. Where that went totally off the rails. Toy Story 2. No, Toy Story 1. Oh, original. Uh, uh, I'm pretty sure. Yeah, I think I've read this too. Yeah. Where Woody was me. Yeah. And they were, they were screening the, the, um, you know, as far as they had gotten. And it wasn't fully rendered and fully realized, but the story, they had to change the story and rip apart a much 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. It wasn't, like, 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, I know you don't really want to see other stuff as made on the inside. Yeah. That's what I know. That was awesome. You know, it's all magic. One. Same thing in regular startups too. Exactly. What, uh, I don't want to dwell on this for too long because it's not a super core part of the story and, and you had left Microsoft at this point, but, um, you know, obviously Halo 2, despite the sausage making being a nightmare for you, goes on to become the, you know, 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. Um, and you were gone, so you may not know, but to, to the extent you do, how, how and why did that happen? Um, Microsoft ended up retaining a, a sake in Bungie, but, um, and Bungie kept working on Halo 3, reach and, and ODST. Um, but, but how, how did that happen? Okay. So I'm going to, I'm going to tell you what I understand about the story and, and, you know, everything up till now, I've talked about stuff I was directly involved with now. It's, it's more like things I've heard. So, I apologize in advance to anyone if I get something not quite right here, but, um, after Halo 2 shipped, there was a disagreement about, um, royalties. There were some kind of royalty agreement between the person who followed me and the guys at Bungie. And, um, after Halo 2 shipped, the Bungie guys felt like that deal was not followed, uh, the way they thought it should be. Um, and they decided they would be better off separate, uh, as a separate company again, and 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, uh, a certain number of titles. Um, and, and they, and once those titles were made from Microsoft, they were free to go, basically. Um, and so they entered into an agreement to do that. And I think that 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. Well, destiny. So Ed, one of the things that we like to talk about a lot are, 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, um, brought to the deal, um, the combination of those things is a gigantic multiple of, um, the two parts in their separate, kind of a one plus one equals three thing. Um, yeah, what characteristics, 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. You know, I want to have the resources to make the game that I have in my head, you know, and, and then I want to want to see it have an honest chance to reach its, its market, right, to reach as many people as possible. So, um, you know, if you think about, uh, trying to do that as a little struggling independent company, like Bungie was versus trying to do it under the umbrella of Microsoft, it'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. I mean, that's, um, that's a big opportunity for someone to, um, have their, their ideas and their, you know, their creativity right along with that, with that big push. Um, so that's, I think what's in it for a game developer to want to, to want to team up and be part of, part of this bigger thing. Um, I think the challenge along the way is, um, and, you know, and this is something we always, you know, I worry a lot about and we, we worked hard on his. How do you, I mean, one of the things that makes these teams special is they have their own unique culture. Like, you know, that's what you should hear when I'm, 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 and to all, be able to just shout to each other across this room, you know. Um, and, and by the way, if you go to visit Bungie's office now, it's in this giant, you know, used to be a movie theater and some 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 protected 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, you know, efficiencies of the larger business and respecting the culture of the smaller. Did you struggle at all with the decision to move them to red? I didn't, but in retrospect, I probably wouldn't have done it later. 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, uh, 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, you know, I had these two, two really great teams who worked for me. One is what's called ensemble studios and they did the age of Empire series down in Texas and another, you know, 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, Bungie would be like, we're hard core, you know, 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. 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 as well as matters. It's not which culture you have that matters, you know, having a strong culture that attracts a specific, 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, 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, you know, I haven't heard any other episodes. So, yeah, well, you know, we talked about Pixar, we've done Instagram and we've done Twitch 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 and they've all thrived hugely. And for us, I think a big takeaway has been the importance of doing that. When you know, when you have a great culture, that's when great things came in. Yeah, I mean, I think one of the things was we were able to bring those two bunch of teams together, though, you know, the Chicago team and the California team together in one spot. And we needed that, I think, to get the halo worked on. So 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 about how do you integrate with the other parts of the company that need to work with you? So 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 and sitting with my teams all through the organization. And then after Xbox came along, there was all of a sudden this kind of bigger Xbox organization. And the head of the 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 them 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. And an example of that would be the first TV ads came back from the agency for Halo. And we showed them to the Bunchy 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. You know, to the Bunchy 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 know, it's that it's the original theme music. Yeah, it's the music and all that. So we had to like way back and try to try to fix this, you know, TV commercial. 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. 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 and where's the appropriate place in the hierarchy to 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 that have all the all the business groups versus, you know, having these sort of family units of these separate divisions where everyone's totally integrated. Right. 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 a Microsoft 18 years, I mean, so I don't know how many times I saw that organ, that reorg happened back one way and then back the other and back one way and back the other. It's like the grass is always greener, you know, it's like one way has a certain set of problems and then the other way has a different set of problems and so it seems like they just hoggo back and forth between the two. I don't really understand it. 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 we'd love, 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 four, the fifth is, is other wild card. But yeah, you know, for, for me, it's interesting. I have really paged 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 simply because more than anything, you know, because of the spin up and ended up happening later on in Bungie going on to to leave Microsoft and that DNA to leave Microsoft and and Halo's sticking behind as a product for Xbox. What would you say Ben? I'm not going to disagree. I think it's absolutely that. Like you said, there's there's definitely a learning from 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 yeah, I think my vote will be product. I'm sticking with the people for sure. I mean, you know, it's one thing that create a franchise and it's another to to continue it is one thing I'd say, you know, and these are the people that created Halo, you know, out of nothing. And so, you know, it's true, there's a different team that's that's moving Halo forward now and and they've added a lot of interesting new things to the to the franchise but Bungie created it. Yeah. And then they created Destiny, which I also think he's very good. So I don't know, I just always fall on the side of the people or what like matter in these companies. Well, one of the one of the pieces of feedback we've gotten is we need more disagreement on this show. So, all right. This is great. We're going to bring people in like you have 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. Yeah. Okay. Second the 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 and technology that this acquisition embodies or represents? For me, and this is why I thought Destiny was a great seg. 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 first it was early PC gaming and early consoles and then consoles really became dominant with the age of Xbox and PlayStation 2 and Halo and Bungie Road that success. And then in recent times, there's been the age of free to play. The simultaneous age of free to play and mobile and it's interesting to see Halo is still a huge part of the cultural landscape, but at least in the media landscape in the US. But the gaming industry 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 winners and bigger winners, I think Halo and Bungie represent that really well. Yeah, I mean, I see it maybe a little differently but I'll pick the same milestones as you, you know, for me, it was the time when, you know, the Bungie acquisition happened at the time when the publishers were getting bigger and there was consolidation among the publishers. So it was getting, there was this economy of scale of being big at that time, you know, and that Activision's and Electronic Arts and Take 2's and Microsoft's had an advantage and the little kind of mom and pop developer publisher was going away. Bungie's an example, another acquisition we did was a company called Access Software that did our golf and tennis and other games. And so there's, you know, these things start small and then they, you know, they get somewhat bigger and then at some point, you know, economy of scale really matter, scale really matters and then you start to see a lot of acquisitions and so that was what was happening kind of in, you know, around 2000 when this Bungie acquisition happened. It's also what's happening now in free to play. So 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, had a bunch of hits, trade nations and battle nations, you know. And, you know, at some point, you know, scale started to really matter in free to play, you know, if you're going to compete with you know, clash of clans or candy crash or something, you know, with just these massive audiences and you really want to drive traffic to your game, it really matters that if 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, this, there's kind of cycles to the stuff and we see it, you know, over and over again. You know, maybe it's not just one platform shift, maybe it's, you know, just a natural evolution of each market, right? As some new market comes and 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. Grids 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 your team didn't pull off this acquisition? I really don't. I think 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, you know, not making money on Xbox and not being something the company was serious about. 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 all the other feature bets that are making Minecraft future episode. Yeah, really taking the way for the future of the company. So it's pretty amazing to hear how important it was to appreciate 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 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 Christians and but like, boy does that sound like low-end disruption. Even in your career, you're leaving to go and play with the thing that nobody can take seriously. And it's a total toy. And how could I ever get big? And this is the thing that 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, as you know, I'll just say it's fun to be part of that. Yeah. All right, well, A plus. I show my car. Yes. I'll also lend you my hand. We'll let Ed go last here. You know, I've been struggling with this one. And not just for creating disagreement for the sake of the show. But this acquisition, really any perspective you look at it, you know, and that one that Ben you and Edward 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 helps launch. Although Microsoft didn't monetize by it. So, you know, really any dimension you look at it, it's an incredible acquisition. The thing that I just, you know, I struggle with a little bit, I come back to the spin-off. And I think about what would hate both Halo and Xbox and Bungie, 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. And for many years, you know, 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 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, but. Yeah, do you think it's fun out? You're saying because they lost it again. 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 the Microsoft missing mobile? Windows phone is a direct result of the Bungie spin out then. Well, even mobile gaming, right? Like Microsoft never had a, you know, they had this incredible presence in console gaming. 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. Do you think that there's like unrealized potential if that team had stuck there in the thing? I don't know. I don't know. Maybe not. And maybe, maybe, maybe even destiny never would have happened within Microsoft. So I don't know. But I look at Halo today. And I think, and maybe it's just the natural course of things. But I, it's not as culturally relevant as it once was. And not as relevant to video gaming as a whole as it once was. Okay. Well, a few things. Microsoft had a right of her strythusol on destiny. So they could have they could have posted it. They wanted to. So, um, whether they made the right choice on that or not, I guess time will tell, but just this, just one thing to think about. I was probably involved in a dozen or so acquisitions, big and small at Microsoft. And, uh, definitely the one that went the best was acquiring Bungie. So, I'm not going to give myself an A plus, 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. Sounds good to me. And you know, it's kind of fine. Like we throw these arbitrary grades around, but it's sort of just a framework for us to get to, to, uh, dig in a little bit and think about what could have been or what was unrealized. Sure. Yeah. Yep. Thank you, Ed. We really appreciate all the time. Super special treat both for us and our listeners and that, like I said, you're welcome back anytime to disagree with us. Thanks a lot. It was really fun to be part of this. I really appreciate it. And for listeners, um, we are acquired FM on Twitter. Yeah. Sorry. This one went so long, but I just got around it. So many grade moments. Thanks again. Hey, guys.