Acquired - Bungie

0:00All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired. LaGora, the agentic operating system that is redefining how the world's best legal teams work. Yup, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. LaGora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

0:30So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done. And that's how you get features that customers love, like tabular review where you.

0:49drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Lugora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work, and this means that the pie can grow even as each individual task takes less time.

1:09And they recently launched LaGora agent offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And LaGora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early LaGora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Legora now has over a hundred thousand lawyers on the platform from 1200 legal teams in 50 countries. And crazily they went from one million to a hundred million in ARR in about 18 months. Truly insane numbers. And that is the real test.

2:01Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in house at a company, you can learn more at logora.com slash acquired and just tell them that Ben and David sent you. 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.

2:30Bear with us and we'll get the Kings worked out for future shows. Hello and welcome to episode 4 of Acquired, the podcast where we talk about start-up acquisitions that actually went well. I'm Ben Gilbert. I'm David Rosenfall.

3:00And 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 Freeze, who was at Microsoft during the acquisition, and actually was the person that Microsoft whose group led the acquisition of Bungie, so we're very honored to have Ed with us today. He was at Microsoft from 1986 to 2004, led the acquisition of Bungie 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.

3:56Thanks. 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. It's good. David, do you want to do the acquisition history and facts? 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.

4:26Alex Seropian and Jason Jones and they made a few games mostly for Mac actually during the 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 successful sequels and other projects that came out of that then you have a fun Personal history with yep, yep. Yeah, actually my dad was a reviewer for the Mac users of Delaware of Marathon kind of in the real early days before it came out and then as the trilogy unfold and we actually he sent me some pictures last night we actually have the the collector's edition box set of the Marathon trilogy for Mac pretty cool and And so that was that was bungee for most of the 90s and then in the late 90s

5:24In 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 1999, 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.

5:50and Ed steps in and Microsoft on in June of 2000 announced that they were acquiring a 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 and thanks again for joining us tell us take us back to you know it was 15 years ago now how How did it all happen? How did it come together? I was also a Bungie game player. Even before I started running Microsoft 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 in a meeting. We called it Valentine's Day Massacre that happened in February 2000.

6:48And 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. Normally games take and no developers even knew about the Xbox at this point right? I mean you know it was just an idea before then and so So I was desperate for content. And what happened was one day my phone rang, and it was again in Peter Tampy, who did Fisdev for Bungie, who I've gotten to know all the other previous few years. And he told me that Bungie was in bad financial trouble. They were running out of money, and they were likely going to be

7:43acquired if if nothing else happened that they were gonna be acquired by take two take two already owned a third of a third of bunchy from a earlier transaction And he wanted to see if I was interested The by the way, there's some debate about this point because also their John Kimick was also involved so there's a again in one of our product planners John Kimick his 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 got to imagine there were other...

8:41maybe 15 or 20 or so launch titles for the Xbox when it came out so you guys did do partnerships 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?

9:04high 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 I had less than two years and I needed to try to get this portfolio done and so so that was it was definitely happy to talk to them and and try to put some together Did you try to do any other acquisitions at this time was were you thinking about doing like an all first party launch if you could 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 then launch it was about half and half We You know, we had signed a deal with long landing in its group odd-world inhabitants. That was our first big deal we did

9:55And that was kind of the big deal because we pulled them away from Sony who had published their previous game. So, in fact, there's a funny Penny Arcade comic from the time, where Lauren Landings 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.

10:24What were some of the kind of selling points for bringing those guys in house? You've got a lot of different tools at your 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? 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 Okay, I mean in what it was publishing or or or acquisition Exactly, and so in this case the developer was calling and saying we're running out of money

11:19Bungie at that time was a developer slash publisher they did bull and that was It was more common then but pretty much all the little developer publishers were going out of business because doing distribution back then was becoming harder and harder for a little company to do I mean to try to knock on the door of a Walmart and that kind of thing Probably especially as the world was shifting the console, right? Yeah, exactly so 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 at MacWorld. And knew that this is something I really hoped I could get for us as part of our lineup.

12:14Did you did you or anybody else at Microsoft have have any qualms about? acquiring a company that was mostly a Mac developer at that point or was it just all about the content? No, I didn't care about the Mac thing at all Honestly, I mean they had done myth versions of their games or I'm sorry They did PC versions of their games like a PC versions of 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 required? No, basically Which is funny because if you watch the Macworld trailer, you know

13:12I 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. 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 deaths on stage.

13:39So we can 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 want basically wanted all the all the developers in the company And so I but take to already own part of the company so I had to call up ahead of take two which is guiding 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 great. Oni, right? Yeah. Oni was the other game very good. So Bungie had two teams, one in Chicago and one down in California. And the California team was doing Oni and the Chicago team was doing Halo. And so basically the deal I stuck with Ryan was that he would get ownership of all the back catalogs. So all the intellectual property for all the Bungie titles that had been published so far.

14:39Plus, we would finish only for them and ship only. And then the only 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 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.

15:09Honestly, at the time, though, 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. All right, listeners. Now is a great time to tell you about a longtime friend of the show, Vanta.

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16:52trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here. And literally hundreds of acquired listeners have become Vanta customers at their companies over the years. So you can get a thousand dollars off Vanta at Vanta.com slash acquired. That's V-A-N-T-A dot com slash acquired for a thousand dollars off and just tell them that Ben and David sent you. 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 did the deal, I didn't even think about it, but yeah, apparently jobs was not happy. Steve Jobs was not happy and so I don't know a few weeks later, once the deal was announced, I got mail from Steve Balmer or got a call from Balmer or something and it just said

17:52Steve Jobs is mad about that you acquired Bungie column and try to calm him down or something like that. We had this phone number. Steve Jobs, it was over. Sounds like he's a noose to hang yourself. I'm like, okay, they can do this.

18:12So, you know, so I dialed a number. How long does it take you to work up the nerve to dial this? Not very long, but I had an idea which was good, which I'll explain in a minute. So I didn't just call with no idea. I called with an idea. And here's the thing. The irony of the whole thing was the whole deal started when Peter Tamtey, the Bistav guy, from Bungie called me.

18:41But 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, you know, it'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 porting 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.

19:09So I call Steve, and I say, hey, sorry, I'm the guy who bought my key. But we want to do a Mac version of Halo. And actually, I want to do a lot of other Mac games. So I don't have anything against the Mac. I worked on Mac Excel. I worked on Mac Word. We have age vampires 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 Tamtey, ex-bungee 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. 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.

20:09So 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 pour a bunch of our games to the Mac. Maybe we'd make some money on that. So it felt like a real win. There was just one requirement from Apple, and that was that Alex Seropian and I...

20:39show 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, that's what it takes to get the deal to ensure I'll do it.

21:08so we agree and you know a few months go by and then it's time for Macworld 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 Uh, rehearsals really not going well. Steve's really upset with how, how everything is. Uh, we're really don't want you guys to come in. Uh, we'll go on, check in your hotel and we'll call you, we'll call you after dinner. I'm like, okay, so Ox and I go, we check in. We're waiting. The phone rings, you know, maybe seven o'clock at night. Let me say, um, it's still really going badly. Jobs is really bad. Uh, why don't you guys just come in in the morning?

22:01And 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 gonna go out front of 10,000 people and we're gonna say something for a minute or so. Okay, so we show up the next morning and just before it starts, Steve Job comes over, shakes our hand, says, hey, I'm gonna.

22:30I'm gonna 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 I haven't seen the videos But I tell you, so those are my only encounters ever in my life with Steve Jobs. He was always very friendly to me the whole time I talked to him on the phone or in person. And he did an amazing job. Sitting in the front row of the Mac world, watching him just take the audience and just hold their attention. It was incredible to see. It was really fun to be part of. Which is a good segue. At that moment,

23:29You know, it sort of feels like everybody, you know, Steve Jobs is happy. Mac users are happy. Halo's still coming to the Mac. Take two. Get's only, 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.

23:53for the probably two or three of our listeners out there who don't know what happened next. Halo goes on to the first Halo has, 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. There are no hard numbers out there, but kind of 200 to 300 million.

24:23dollars 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 GameStop to go by Halo and Halo 2 and Midnight it was incredible I think I was up for 24 hours. I mean, just this sheer amount of mountain dew and 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.

25:21and uh, and then the kind of the rest of well I would say the rest of the story is history would would love to bring it back in and uh you know the bungee story takes a few interesting turns along the way but um but first Ed I mean when you were you you were desperate you needed content for the launch could you ever you knew hella was good but did you think it was gonna 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 paint on the outside. It was a straight line, right? I mean, the bungee 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. Microsoft, just quirky from a Microsoft point of view.

26:17Like Microsoft, everybody has private offices with a door that can shut and that's like the selling point of going to Microsoft or at least it was back in the day you got your own private office. And so I proudly toured the bungee guys around this new wing that we had just built out for them in one of the buildings and it was all 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...

26:43all 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 you know and they're like yeah yeah we want cubicles with really low walls like oh you're kidding me I like I wish I knew this a few months ago so the facilities literally had to tear the walls out of this place So the acquisition price never before disclosed a bungee was was whatever you paid for bungee Plus all the two remodeled you did Buildings and I mean the great thing about you know Working a big company like Microsoft when it came to acquisitions that the corp dev people were so incredible the HR people were so incredible

27:28you 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 and 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.

28:11Did all the engineers just test their own code and they trade testing responsibility around? Yeah, that's pretty typical in the game doesn't especially back then, you know, it's like they thought of testers as you know a bunch of high school kids but But you know not professional all testers like we had at Microsoft and so The other thing the bunch you 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 own 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 gonna I'm gonna give you a test team and I'm gonna park them right outside your secure doors Okay, so they're gonna sit right outside outside your doors

29:00And what happened, that test team was run by a guy named Harold Ryan. And the test team really proved themselves to Bungie over the period of that first halo. They showed them what a group of professional testers can really do. And 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.

29:29So, you know, so the next between Halo 1 and Halo 2, they move that wall. That's a cure wall to be the inside of the testers, so that now the testers will part of the family, so. How's that, how's that for tiny more success? And, and you'd still, even with the addition of testers, I mean, one of the things that I think is so incredible about Bungie is later on in Bungie's history in 2007, it ends up getting respawned out from Microsoft and When that happened, there were only 120 people working there, including the testers. You know who the president of NG is right now? Harold Ryan. That's awesome. So anyway, so that's the story for you. When we first started showing Halo around, to the game press, there was a lot of skepticism.

30:26They were worried about Microsoft entering the console business to begin with. They thought we really didn't understand console games, which was true. Then we're really excited to show them a first-person shooter, which is a PC genre. Looks like a PC game. This isn't Mario. This isn't Sonic. This is proof you guys don't get it. We got a lot of pushback from the press, actually.

30:56E3 2001 we only had half speed graphics cards in the machines that we had at that time and so it didn't show that well in the show floor there was more kind of rumbling in the press there's there's penny arcade comics from that time where the penny arcade guys are really down on the game I don't know if I can swear on your podcast but one of them just says halo is shit And so coming into launch, it was very unclear whether Halo was going to be our hit title. I mean, we're all playing it after hours and saying, is this game as good as we think it is? This seems amazing. But we're all PC gamers. Maybe we're drinking our own Kool-Aid here. Maybe console gamers won't want this kind of a game. Did you have to in preparing for the launch?

31:53Established what was going to be your flagship game for varying marketing channels and the way that you're talking about the platform and what you're showing off or did that sort of organically fall out after you released no absolutely we did 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 And the TV budgets, you know, we could afford to do TV for just a couple titles And so odd world and halo ended up getting Basically equal treatment at launch with big TV campaigns from us And you know odd world was kind of our well, this is a developer's known to console world You know, I should say the game the game was called munches Odyssey Adoreals and company, but 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 gonna it's gonna do best. Yeah, still not sure

32:53In sort of that early launch stage, how do you know and how fast do you know which of those two is good enough? Well, once things start to sell and reviewers get their hands on it, it becomes clear really quickly. But especially back in those days, there were a lot of things that had a lot of lag when it came to marketing. So anything that was in print, for example, it was maybe a three-month delay. If you wanted to be in...

33:21in mailers, not mailers, but like, say like a Christmas catalog that gets inserted and inserted into newspapers and stuff like that, magazines. It was all like three months or four months. So we always had to commit to the marketing team three or four months in advance.

33:43when a game was going to ship. And then if we weren't there, if one of these circulars ran, but the product wasn't available in store, we could get fined, right? So that was always built into our development process. But it's not like today where information just goes boom, out there right away, and you can make changes right away. I mean, there was actually stuff printed with ink, you know, sat in with houses. Yeah.

34:11I do imagine. I'm curious, I really want to ask, especially because the whole theme of our show is thinking about technology, and while there's certainly a huge element of, you know, both Bungie and Halo, and a very first episode we did Pixar, of just content and creativity, there also is a huge element of technology in Halo and Bungie and new technology.

34:38I'm curious from your guys perspective, you know, to me, the story that I write in my head is, you know, the single player experience of Halo is good. It's great, I'd buy the game, I'd play it, but what made Halo is multiplayer, 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.

35:02doing a router and streaming 4xboxes together in my friends basement. Yeah. 4xbox 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, because Xbox Live didn't come out for a year later, right? And so people came up with all kinds of... I remember you could hook your Xbox to a PC and then people would do the...

35:27And then do these PC connections over and over 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 be how much how much did that shape the eventual launch of Xbox live and halo to you know being the I 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. Yeah, so 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 had multiplayer but they also had split screen and split screen multiplayer they had network multiplayer they also had split screen co-op play.

36:23Which you don't even have split screen co-op play in Halo 5. Yeah, controversially. So, I mean, it was amazing what was in that first game, but yeah, after they shipped Halo 1, then working on it, working with the Xbox Live team, helping them develop, or helping them develop Xbox Live and develop how games would work on Xbox Live. That was a big thing for the Halo team.

36:53They worked really closely with Xbox Live, tons of Halo fans on the Xbox Live side, so they really wanted to work with a bunch of you guys. It was a very mutual respect experience there. The pause, Halo wasn't due for a few more years. Halo 2 wasn't due for a few more years, and I can talk a little about that or what happened there. Somebody reminded me of the other day that actually the first Xbox Live title that we launched with our first party group was actually out of that that facet team that I mentioned earlier and it was a mech commander was the first one but anyway meanwhile the bungee guys are go off after shipping Halo 1 and a couple things happen Jason Jones who's you know just the creative genius behind everything bungee decides he's gonna leave that the Halo team and start a new project and so he in a small group

37:52go off on the side and they start to work on this new project. Meanwhile, the Halo guys, the main Halo team, starts working on Halo 2, and they get a couple of years into it, and it's kind of going off the rails without Jason running it. So Jason comes back and he looks at it, and this is about a year before we're supposed to ship.

38:21He's very unhappy with it and then 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 the Halo 2, you know for me is like this nightmare Halo 2 with 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 nother year. So instead of being out in 2003, it's gonna be out in 2004. And so I have to go to Robbie, my boss, and tell him he's not gonna have Halo 2012, 2004, and blah, blah, blah. Anyway, that's not my favorite memory. I'm glad you liked the game when it came out. So yeah, anyway, that was, Jason got it back on track, and they were able to bring out a game.

39:20And 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 Applying Pixar. And so many parallels because it's a creative, hit space business where you're doing the creative studio work in-house and putting this thing out and hoping it really resonates with people. And one of the things that makes that process work is the ability to have that honest conversation internally and the mechanisms by which you fix things when you're off the rails and there's this incredible parallel here to, you know, the story of Toy Story as it was being called where that went totally off the rails. Toy Story 2. No, Toy Story 1. Original. I'm pretty sure. Yeah, I think I've read this too. Yeah. Where Woody was me. Yeah. And they were screening the, you know, as far as they had gotten.

40:18and it wasn't fully rendered and fully realized but the story they had to change the story and rip apart a much 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. And they were getting a bunch of feedback I think from Katzenberg or something and it was yeah all screwed. I know I know you don't really want to see other stuff as made on the inside. It was awesome. It's all magic in one go.

40:46Same thing in regular startups too. I don't want to dwell on this for too long because it's not a super core part of the story. And you had left Microsoft at this point. But, you know, obviously Halo 2, despite the sausage making being a nightmare for you, goes on to become the most successful. I think video game of all time at that point when it was launched and then Halo 3 even eclipsed that and helped launch the Xbox 360. But then after Halo 3, Bungie, spins out of Microsoft, and you were gone, so you may not know, but to the extent you do, how and why did that happen? Microsoft ended up retaining a stake in Bungie, and Bungie kept working on Halo through Reach and ODST, but how did that happen? Okay, so I'm going to tell you what I understand about the story.

41:44Everything up till now I've talked about stuff I was directly involved with now. It's more like things I've heard so I apologize in advance to anyone if I get something not quite right here but After Halo 2 shipped there was a disagreement about royalties there was some kind of royalty agreement between the person who followed me and the guys at bungee And after Halo 2 shipped, the bunch of guys felt like that deal was not followed the way they thought it should be. And they decided they would be better off separate as a separate company again than part of Microsoft. And they went into negotiations with Microsoft to figure out how they could split out and do that. And my understanding is Microsoft agreed to let them go.

42:37go out and become an independent company under the conditions that they do a certain number of titles. And once those titles were made from Microsoft, they were free to go, basically. And so they entered into an agreement to do that. And I think those titles were Halo 3, Halo ODST, and Halo Reach. And so after they finished Halo Reach, they went on to do their new game destiny.

43:07Destiny. All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part. Yeah. The hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like the risks are real.

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45:20the two parts in their separate. Kind of a one plus one equals three thing. What characteristics, 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 won't have the resources to make the game that I have in my head, you know. And then I want to see it.

45:48have an honest chance to reach its market, right? To reach as many people as possible. So, you know, if you think about trying to do that as a little struggling independent company like Bungie was versus trying to do it under the umbrella of Microsoft, that's about to launch a brand new console and has a $300 million marketing budget and it's gonna, you know, make a lot of noise about this new platform. I mean, that's a big opportunity for someone.

46:18to have their ideas and their creativity right along with that big push. So that's, I think, what's in it for a game developer to want to team up and be part of this bigger thing. I think the challenge along the way is, and this is something we always, I worry a lot about, and we work hard on is, how do you...

46:47I 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 saying bunching wanted to rip out the walls because they work super collaboratively as a team. They wanted the programmers and the artists to be able to just shout to each other across this room, you know. And by the way, if you go to...

47:11Visit Bungie's office now. It's in this giant, well, used to be a movie theater in some giant bay. It's still completely open because that's part of their culture. So how do you integrate something creative into a bigger company like Microsoft and still protected so that it can have its own ED 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.

47:39And respecting the culture of the smaller did you struggle at all the decision to move them to? 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 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. It expresses itself in the product itself. I like to talk about how I had these two really great teams who worked for me. One was called Ensemble Studios, and they did the Age of Empire series down in Texas, and another, the Bungie team. If you looked at the cultures of those two companies, they were almost diametrically opposed. If you wrote their values,

48:35down, you know, there would be like opposite lists. You know, like one would like bunch, you would be like, we're hardcore, you know, and ensemble would be, we're a family, you know, you know, I don't know, it's stuff like that. It would just be really different. And that kind of taught me that it's not that there isn't like a culture that works, you know, it's like, Having a culture is what matters. It's not which culture you have that matters. Having a strong culture that attracts specific people that fit within that culture and really enforcing it and really making it culture ends up just expressing itself in the product. I don't know how else to say it. It's so cool to hear you say that because that's such a...

49:27been a core theme of our whole show and part of the reason we decided to do this. Good, I haven't heard any other episodes. Yeah, 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.

49:55For us, I think a big takeaway has been the importance of doing that. 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, 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 always the right thing to do.

50:24And then the challenge you have in a bigger organization is 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 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 they really got separated from the teams and all of a sudden it was sort of an us and them kind of thing rather than that we're all working together. We do different functions but we're all trying to do the same thing.

51:23I 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. They were really, really hated. There's a guy running around with a gun and he's shooting stuff, and they're, you know...

51:40And you might think, oh, that's what Halo is about. You know, to the Bungie 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 it's 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.

52:09all the way through so that they really understand the vision for the product. It's so interesting thinking about just from my time at Microsoft, when we kind of had the one Microsoft reorg and went functional from divisional, and where's the appropriate place in the hierarchy to separate into divisions versus functions? So with functions being, you have all the marketing people together for all the business groups and all the tech people that have all the business groups versus having these sort of family units of these separate divisions where everyone's totally integrated. Right. And 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, that really happened back one way and back the other and back one way and back the other.

53:05The grass is always greener, you know? One way has a certain set of problems and the other way has a different set of problems and so it seems like they just toggle back and forth between the two. I 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 you to participate too.

53:34The first is that Ben and I each assign a category to the acquisition and they 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 pegged Halo and bungee as a product acquisition for Microsoft. But it's interesting hearing you talk at 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, because of the spin-up, it ended up happening later on in Bungie going on to leave Microsoft and that DNA to leave Microsoft and Halo's sticking behind as a product for

54:31for Xbox. What would you say Ben? I'm not going to disagree. I think it's absolutely that. Like you said, 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.

54:59I mean, you know, it's one thing to 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 moving Halo forward now and they've added a lot of interesting new things to the franchise, but Bungie created it.

55:27Yeah, and then they created destiny, which I also think is very good. So I don't know. I just always fall on the side of the people are 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 gonna bring people in there like you had to disagree with us. You're welcome back anytime If Dave 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 in technology that this acquisition embodies or represents? For me, and this is why I thought Destiny was a great sig. You know, for me,

56:25Bungie 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 there was early PC gaming and early consoles and then consoles really became dominant with with the age of Xbox and PlayStation 2 and Halo and Bungie wrote that success and then you know, in recent times, there's been the age of free to play. The simultaneous age of free to play in mobile 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 moved on in a lot of ways and what's big now are companies enabled by this next wave and that's where

57:22Bungie'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'm gonna, I mean, I see it maybe a little differently, but I'll pick the same milestones as you, you know, for me.

57:52It was the time when the Bungie acquisition happened at the time when the publishers were getting bigger and there was consolidation among the publishers. There was this economy of scale of being big at that time. Activisions and electronic arts and take-tos and Microsofts had an advantage and the little mom and pop developer publisher.

58:16Which was going away bungee'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 get somewhat bigger and then at some point you know economy a 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 bungee acquisition happened. It's also what's happening now in free to play so far on your example, you know, I mean, you know, I was on the board of z2 v2 was you know really early free to play company Had a bunch of of hits trade nations and battle nations, you know

59:13And, you know, at some point, you know, skills started to really matter and free to play. You know, if you're going to compete with, you know, Clash of Clans or...

59:29or 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 C2 to compete and, you know, just like Microsoft bought Bungie, it made a lot of sense for King to buy C2. So I think, you know, there's kind of cycles to the stuff and we see it, you know, over and over again.

59:54You know, maybe it's not just one platform shift, maybe it's 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...

1:00:49you 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 the HoloLens and a lot of other future bets that are making Minecraft future episode. Yeah, yeah. Really taking the way for the future of the company. So it's pretty amazing to hear.

1:01:16how 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.

1:01:44be 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 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 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 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. I'll just say it's fun to be part of that.

1:02:41Yes, this is what 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, in that one that Ben you and Ed were just talking about is such a powerful one. Look at it financially. I mean over the lifetime of the Halo franchise and there's no way anybody could have foreseen this at the time, but It's made over five billion dollars in revenue just from game sales alone. That's before merchandise, that's before movies, that's before machinima, which was a whole another category that Halo really helps launch, although Microsoft didn't monetize by it. So really any dimension you look at, it's an incredible acquisition. The thing that I struggle with a little bit, I come back to the spin-off and I think about

1:03:40What 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 and For many years, you know while mobile was 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 because it spun out? You're saying because they lost it again that day. Yeah, in 2007, which ended up being was the the very top of the console market.

1:04:37or at least close to it before the next wave was coming. And right then, Microsoft lost Bungee. So are you blaming Microsoft missing mobile? Windows phone is a direct result of the Bungee spin out then. Even mobile gaming, Microsoft never had this incredible presence in console gaming.

1:05:02When I'm sitting there screwing around on my phone playing Clash of Clans or whatever, it's not a Microsoft property. Do you think that there's unrealized potential if that team had stuck there in the thing? I don't know, I don't know. Maybe not, and 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 it's not as culturally relevant as it once was.

1:05:30and not as relevant to video gaming as a whole as it once was. Okay, a few things. Microsoft had a right of her strythusol on Destiny, so they could have pushed it if they wanted to. So, whether they made a 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 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 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.

1:06:30Thank 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 it And for listeners We are acquired FM on Twitter. Yeah, sorry this one went so long, but I just got real into it so many great moments Thanks again guys All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig. Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale. Yep. In the...

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