Episode 4 Bungie (with Xbox CoFounder Ed Fries)



In this episode of Acquired, Ben Gilbert and David Rosenthal, along with special guest Ed Fries, former Microsoft executive, delve into the acquisition of Bungie by Microsoft and its pivotal role in the success of the Xbox. They discuss Pilot, a comprehensive accounting service for startups, and the critical importance of focusing on a company's core competencies, as inspired by Jeff Bezos' philosophy. The conversation then shifts to the history of Bungie, the creators of the Halo franchise, highlighting their journey from a struggling startup to a major player in the gaming industry post-acquisition. The episode also touches on the cultural differences between Microsoft and Bungie, the challenges of integrating a creative team into a larger corporation, and the eventual spin-off of Bungie, which continued to innovate with the release of Destiny. The acquisition's impact is examined, considering the potential of what Bungie and Halo could have achieved had they remained integrated within Microsoft during the rise of mobile and free-to-play gaming.

Summary Notes

Pilot's Role in Startup Ecosystem

  • Pilot is a comprehensive accounting, tax, and bookkeeping firm focused on startups and growth companies.
  • It is the largest startup-focused accounting firm in the U.S.
  • Pilot handles the financial operations for startups, including finance, accounting, tax, and CFO services.
  • They work with a range of companies, including high-profile startups like OpenAI and Airtable.
  • Pilot allows companies to focus on their core product and customers by outsourcing non-core tasks like accounting.

"Pilot is the one team for all of your company's accounting, tax and bookkeeping needs and in fact now is the largest startup focused accounting firm in the US."

This quote highlights Pilot's comprehensive service offerings and its status as a prominent player in the startup accounting sector.

Startups Focusing on Core Strengths

  • Jeff Bezos's AWS-inspired axiom suggests startups should focus on their unique value propositions and outsource the rest.
  • Accounting is a critical function that requires professional handling but doesn't directly impact the product or customers.
  • Outsourcing accounting to firms like Pilot can help startups allocate resources more effectively to their core operations.

"Startups should focus on what makes their beer taste better. In other words, only spend your limited time and resources on what's actually going to move the needle for your product and customers, and outsource everything else that you do as a company that doesn't fit that bill."

This quote encapsulates the strategy of concentrating on core business elements that drive value for customers and outsourcing peripheral tasks.

Pilot's Services and Client Growth

  • Pilot sets up and operates a company's entire financial stack.
  • They have been serving thousands of startups for years, including during their scaling and growth phases.
  • Pilot offers a discount to listeners who use the show's referral link.

"Pilot both sets up and operates your company's entire financial stack. So finance, accounting, tax, even CFO services like investor reporting from your general ledger all the way up to budgeting and financial sections of board decks."

This quote describes the comprehensive range of financial services that Pilot provides to its clients, emphasizing their capability to manage complex financial operations.

Introduction to Acquired Podcast Episode Four

  • Ben Gilbert and David Rosenthal introduce the fourth episode of the Acquired podcast.
  • The episode focuses on Microsoft's acquisition of Bungie, the creators of Halo.
  • Ed Fries, who led the acquisition at Microsoft, is the special guest.

"Hello and welcome to episode four of acquired, the podcast where we talk about startup acquisitions. That actually went well. I'm Ben Gilbert. I'm David Rosenthal."

This quote serves as the opening to the podcast episode, setting the stage for the discussion on successful startup acquisitions.

Bungie's History and Microsoft Acquisition

  • Bungie was founded by two University of Chicago undergraduates and developed several successful games for Mac.
  • Their breakout success was the game Marathon.
  • Bungie unveiled Halo at a Macworld keynote in 1999, introduced by Steve Jobs.
  • Microsoft acquired Bungie in 2000, making Halo an exclusive title for the Xbox launch.

"So most people are probably familiar with Bungie, the creators of the video game franchise Halo."

This quote introduces Bungie as a significant player in the video game industry, setting the context for the discussion of its acquisition by Microsoft.

Ed Fries' Role in the Acquisition

  • Ed Fries was a fan of Bungie's games before leading Microsoft's game business.
  • He was tasked with preparing a portfolio of games for the Xbox launch in less than two years.
  • Bungie's financial troubles led to a call from their biz dev, Peter Tampte, which initiated the acquisition talks.

"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."

This quote reveals Ed Fries' personal admiration for Bungie's work, which influenced his interest in the acquisition.

The Deal Between Microsoft and Take-Two Interactive

  • Microsoft and Take-Two Interactive had to agree on how to split Bungie's assets.
  • Take-Two retained ownership of Bungie's back catalogue and the game Oni, while Microsoft acquired the Halo IP and Bungie's developers.
  • The deal was seen as beneficial for Microsoft due to the success of Halo.

"So basically the deal I struck with Ryan was that he would get ownership of all the back catalogs. 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."

This quote explains the terms of the deal, where Take-Two Interactive would retain certain assets while Microsoft gained the rights to the Halo franchise and Bungie's development team.

Microsoft's Strategy and Reaction to the Acquisition

  • Microsoft's strategy was to support the best game developers in ways that suited them, whether through publishing or acquisition.
  • There was no specific intention to acquire companies, but Bungie's situation presented a unique opportunity.
  • Steve Jobs was reportedly unhappy with the acquisition, prompting a call between Ed Fries and Steve Ballmer.

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

This quote outlines Microsoft's approach to working with game developers, emphasizing flexibility and support tailored to the developers' needs.

Acquisition of Bungie and Interaction with Steve Jobs

  • Ed Fries discusses the acquisition of Bungie by Microsoft and how there was initially no job for one ex-Bungie employee, Peter Tampte.
  • Ed Fries had a conversation with Steve Jobs about porting games to Mac, including Halo, and mentioned Peter Tampte as the right person for this.
  • Steve Jobs was friendly and receptive to the idea, assigning a team member to work out the details with Ed Fries.
  • Apple agreed to fund Peter Tampte's new company for porting PC games to Mac.
  • A condition from Apple was for Ed Fries and Alex Saropian to appear on stage with Steve Jobs at Macworld to announce the partnership.

"So I call Steve and, you know, hey, sorry, I'm the guy who bought Bungie, but we want to do a Mac version of Halo." This quote shows Ed Fries reaching out to Steve Jobs to discuss the possibility of bringing Halo and other games to Mac, leading to a partnership.

"Apple agreed to fund the creation of his new company, which was really cool." This quote highlights the outcome of the conversation with Steve Jobs, with Apple funding Peter Tampte's new company.

Macworld Experience and Steve Jobs's Stage Presence

  • Ed Fries and Alex Saropian had no rehearsal before their stage appearance at Macworld due to Steve Jobs's dissatisfaction with the rehearsal process.
  • Despite the lack of preparation, they were instructed to wing it on stage, speaking briefly after Steve Jobs cued them.
  • Ed Fries reflects on Steve Jobs's ability to captivate the audience at Macworld and finds the experience enjoyable.

"We're going to go stand in front of 10,000 people and we're going to say something for a minute or so." This quote describes the daunting experience of going on stage without rehearsal at a major event.

"He was always very friendly to me. Both times I talked to him on the phone or in person, and he did an amazing job." Ed Fries expresses his positive personal interactions with Steve Jobs and admires his stage presence.

The Success and Cultural Phenomenon of Halo

  • Halo had a significant attach rate to Xbox sales, selling a million units in six months and an estimated 6.5 million over its lifetime.
  • Halo became a cultural phenomenon, with Halo 2 achieving record-breaking sales on its launch day.
  • The success of Halo was uncertain before launch, with skepticism from the press and doubts about the appeal to console gamers.

"Halo goes on to the first. Halo has, I believe, a 50% attach rate to all xboxes sold within the first year of launch." This quote provides statistics on the success of Halo in relation to Xbox sales.

"Halo two ends up when it launches in 2004 doing $125,000,000 in sales on the first day and becomes the fastest selling media product in us history." This quote highlights the remarkable sales achievement of Halo 2 on its launch day.

Bungie's Integration into Microsoft and Testing Culture

  • Bungie's team had a unique culture that clashed with Microsoft's, preferring an open-space environment over private offices.
  • Bungie initially resisted Microsoft's testing culture, but eventually embraced it after seeing the benefits provided by a professional test team.
  • Harold Ryan, who ran the test team for Bungie, became the president of Bungie, indicating the importance of testing in game development.

"The bungee guys were always incredible to work with. Super talented." This quote speaks to the talent and unique culture of the Bungie team within Microsoft.

"They showed them what a group of professional testers can really do." Ed Fries emphasizes the value of professional testers, which Bungie came to appreciate over time.

The Impact of Multiplayer on Halo's Success

  • The multiplayer aspect of Halo was a significant factor in its success, with players creating their own networks to play together before Xbox Live was available.
  • The team at Bungie managed to create a comprehensive gaming experience in less than two years, which included various multiplayer modes.
  • The success of Halo's multiplayer influenced the development and launch of Xbox Live, with Halo 2 being a key title for the service.

"That's exactly right. 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." This quote acknowledges Halo's multiplayer capabilities prior to the launch of Xbox Live.

"It's amazing how much that team accomplished in less than two years." Ed Fries expresses admiration for the Bungie team's ability to deliver a full-featured game in a short timeframe.

Development and Challenges of Halo Series

  • The Halo series, starting with Halo 1, had significant influence on Xbox Live's development.
  • Jason Jones, the creative leader behind Bungie, left the Halo team after the first game to start a new project.
  • The main Halo team faced difficulties with Halo 2's development, particularly with technical aspects like a new lighting model.
  • Jason Jones returned to the Halo team to address the issues, requiring an additional year to fix the game, delaying the release to 2004.

"Jason comes back and he's like, I can fix this. And he goes through and just redoes a whole big part of Halo two."

This quote highlights Jason Jones's pivotal role in salvaging Halo 2's development, demonstrating his importance to the project and the significant changes he implemented to ensure the game's success.

Parallels Between Halo and Toy Story Development

  • The development processes of both Halo and Toy Story experienced significant setbacks and required substantial changes to achieve success.
  • Both projects necessitated honest internal conversations and mechanisms to address and fix issues.
  • In the case of Toy Story, the character Woody was initially portrayed as mean, necessitating a rework of the story and a delay in release.

"They had to change the story and rip apart a bunch of storyboards 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."

This quote draws a parallel between the development challenges faced by the Toy Story and Halo teams, emphasizing the importance of aligning the product with the intended user experience, even if it requires significant changes and delays.

Bungie's Independence and Microsoft's Relationship

  • Post-Halo 2, Bungie had disagreements with Microsoft regarding royalties.
  • Bungie negotiated with Microsoft to become an independent company again, agreeing to develop a number of titles for Microsoft before complete separation.
  • The titles agreed upon were Halo 3, Halo ODST, and Halo Reach, after which Bungie moved on to create Destiny.

"After Halo two shipped, there was disagreement about royalties... they decided they would be better off separate as a separate company again than part of Microsoft."

This quote explains the circumstances leading to Bungie's decision to renegotiate its relationship with Microsoft, highlighting the business considerations and desire for independence that drove the separation.

The Role of Culture in Mergers and Acquisitions

  • A key to successful acquisitions is preserving the unique culture of the acquired company.
  • Strong cultures within game development studios like Bungie and Ensemble Studios are essential and manifest in their products.
  • The integration of companies should be managed carefully to maintain their independent cultures while ensuring necessary collaboration with the larger organization.

"Having a strong culture that attracts specific people that fit within that culture, and really enforcing it and really making it that culture ends up just expressing itself in the product."

This quote emphasizes the importance of a strong, distinct company culture and how it directly contributes to the uniqueness and success of the products created by that company.

Integration and Marketing Strategies

  • Integrating marketing teams directly with game development teams can be beneficial.
  • The separation of marketing from the development teams can lead to misunderstandings and a disconnect between product vision and promotional strategies.
  • An example provided is the initial Halo TV ads, which did not align with Bungie's vision of the game, showcasing the importance of cohesive collaboration.

"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 [...] To the bungee guys, that is not what Halo is about."

This quote illustrates the disconnect that can happen when marketing is not closely integrated with the creative team, resulting in promotional content that does not accurately reflect the essence of the product as envisioned by its creators.

Organizational Structure: Divisional vs Functional

  • Microsoft's organizational shifts between divisional and functional structures.
  • Divisional structure involves integrated family units with all functions.
  • Functional structure groups all similar functional roles across business groups together.
  • Creative endeavors may benefit more from a divisional structure with tight integration among different functions.
  • Microsoft has oscillated between these structures, each having its own set of problems.

"Yeah, it's so interesting thinking about just from my time at Microsoft when we kind of had the one Microsoft Reorg and went functional from divisional and where's the appropriate place in the hierarchy to separate into divisions versus functions." "And it sounds like 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."

These quotes explain the distinction between divisional and functional organizational structures at Microsoft, highlighting the integration benefits of a divisional structure, particularly for creative projects.

Acquisition Categories

  • The podcast includes a segment where they categorize acquisitions into people, technology, product, business line, or other.
  • The discussion revolves around whether Microsoft's acquisition of Bungie and Halo was primarily a product or people acquisition.
  • The acquisition is initially pegged as a product acquisition due to Halo's success and Bungie's eventual spin-off.
  • One speaker advocates for the acquisition being people-focused due to Bungie's role in creating and evolving the Halo franchise and their later creation of Destiny.

"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 4th fifth is other." "I'm sticking with the people for know, it's one thing to create a franchise and it's another to continue."

These quotes discuss the process of categorizing acquisitions and highlight the debate over whether the Bungie acquisition was more about the product (Halo) or the people (Bungie team) behind it.

Platform Shifts in Technology

  • The acquisition of Bungie is seen as emblematic of the power of platform shifts in technology.
  • The discussion reflects on the evolution of the gaming industry from early PCs and consoles to the dominance of Xbox and PlayStation, and then to free-to-play and mobile gaming.
  • Bungie's success with Halo during the console era and their pivot to Destiny in the free-to-play era exemplify adaptation to platform shifts.
  • Another perspective focuses on the importance of scale and consolidation in the gaming industry, with large companies acquiring smaller developers as economies of scale become critical.

"This show we talk about, is there an underlying kind of generalizable and broader theme in technology that this acquisition embodies or represents for me?" "So I think there's kind of cycles to this stuff and we see it over and over again. Maybe it's not just one platform shift. Maybe it's just a natural evolution of each market."

These quotes discuss the broader themes in technology acquisitions, specifically the impact of platform shifts in the gaming industry and the natural evolution of markets leading to cycles of consolidation and scale.

The Impact of Halo and Xbox

  • The acquisition of Bungie is credited with being crucial to the success of Xbox.
  • Halo's significance is such that without it, the Xbox 360 might not have existed.
  • The discussion includes reflections on the evolution of Microsoft's gaming division, from being considered a career risk to becoming a major part of the company.
  • The acquisition's impact is analyzed in terms of financial success, cultural relevance, and the potential unrealized due to the spin-off of Bungie.

"I really don't. I think Halo is hugely important to the success of Xbox." "That was a great motivator for me to go make games be an important part of Microsoft."

These quotes emphasize Halo's importance to Xbox's success and reflect on the personal motivation behind contributing to the gaming industry within Microsoft.

Acquisition Grading and Reflection

  • The speakers give grades to the Bungie acquisition, ranging from A to A+.
  • They reflect on the financial success of the Halo franchise and the cultural and gaming industry impact.
  • The discussion contemplates the potential unrealized due to Bungie's spin-off and the subsequent missed opportunities in mobile gaming.
  • The grading serves as a framework to evaluate the acquisition's success and speculate on what could have been.

"I'll go with a because this was the number one one that I was involved with." "So wait, your argument is that there's some unrealized potential here."

These quotes show the speakers grading the acquisition and discussing the potential that may have been lost following Bungie's separation from Microsoft.

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