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Bungie Studios. Small. Entrepreneurial. Highly creative. Developers of vast amounts of intellectual property. Microsoft (NASDAQ:MSFT). Big. Used to be entrepreneurial. Once creative. Harvesters of vast amounts of intellectual property. This was a marriage that was destined to fail.

And, notwithstanding Microsoft's protestations, they had little choice in the matter. And it's not an issue of legal rights, though those certainly are helpful levers when crafting the separation agreement. It is an issue of culture - and money. There is an analogy to this kind of a break in the financial markets; it is when a group of traders running an in-house hedge fund say, "Thanks for the support [name your favorite Wall Street firm], but we really want to run our own show and to capture the lions-share of the benefits. You understand, right?" It is the same gig.

The difference here is that the Microsoft PR machine could really do a better job positioning the story, because it once again seems like they are saying things they want us to believe but that we all know are untrue.

Let's take a little look at how this story unraveled.

From seattlepi.com 10/01/2007:

A friend of mine who has someone close to them that works at Bungie has just been dying to tell me a secret about their future. Since the NDA officially expire today the sent me and email with the details. I have full faith in this contact.

The email is as follows :

"So heres my big secret. You should google Bungie + Microsoft + separation this week.
You know that big ol BILLION dollar franchise Bungie has created for Microsoft, to show their appreciate Microsoft is letting Bungie leave. Of course Microsoft gets to keep all rights to the Halo franchise, but as today Bungie no longer part of Microsoft. Ask anyone who works there to search the global address book, they're no longer in there. Microsoft was supposed to release the press release today but if they wait till the 10/6 the impact wont effect the quarterly results. However today is the actual official date and the day the NDAs expire, however you still didn't hear this from me."

"Apparently MS just wants Bungie to make Halo for the rest of their natural days, and Bungie doesn't like how MS is constantly trying to "handle" everything they do; the way they market their games, the way they interact with their fans (basically the fact that they do appreciate their fans), and how stingy they are with the profits (comparable to the rest of the industry). So as of today they are their own independent entity. They'll probably make Halo 4 for Microsoft, however hey are also free to create new intellectual properties for whatever system they want. (Even though they prefer the xbox platform)"

"What a way to say thank you."

Wow. That was a bomb lobbed into a handful of offices in Redmond. So, in the spirit of message-spin-volleyball, a spokesperson from Microsoft came out with this.

From Eurogamer 10/02/2007:

Microsoft has distanced itself from rumours that it will be splitting with Halo developer Bungie, claiming it never said anything of the sort.

"There's been no such announcement," a spokesperson told us. "We continue to celebrate the tremendous success of the global phenomenon that is Halo 3."

The unsubstantiated claim came from a blog linked to the Seattle Post-Intelligence, which heard from an unidentified "friend in the know" that an announcement on the separation was imminent - apparently Bungie is fed up with just making Halo games.

But the holes in the evidence are vast and varied: the author of post that started it all is Jacob Metcalf (enjoying some publicity) who isn't a member of the usually reliable Seattle Post-Intelligence newspaper, which has consistently distanced itself from user-posted information in blogs.

It also takes a leap of faith to believe that the relationship between Bungie and Microsoft is as bad as this rumour suggests, what with Halo 3 breaking all sorts of records and receiving wide critical acclaim. MS is also the owner of the developer, so a split isn't as easy as it sounds.

Fishy, though, is a reluctance for both Bungie and Microsoft to officially rebuke the rumours and state outright that it isn't true.

Fishy indeed. But, as is usually the case, where there is smoke there is fire, and a roaring blaze hit the mainstream papers just a few days later.

From the Wall Street Journal 10/06/2007:

Microsoft Corp. said the group behind its hit Halo videogame series will become an independent company, marking another in a series of setbacks for the software maker's entertainment group even as it celebrates extraordinary sales of the latest Halo game.

Microsoft said Friday that it will split off Bungie Studios, retaining an equity stake in the company. Bungie, which Microsoft purchased in June 2000 in a deal analysts valued at $20 million to $40 million, will operate independently and will be allowed to make games for game machines other than Microsoft's Xbox 360 console, the companies said.

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Executives at Microsoft and Bungie didn't disclose details of the split, saying only that it was based on the desire of game makers at Bungie to operate independently. "This is not a divorce," said Shane Kim, the Microsoft vice president who heads the company's game development. "This is the best way for us to pursue a long-term relationship with Bungie."

The change adds to a string of surprises from the videogame group in a year Microsoft is hoping to show that its expensive seven-year expansion into videogames will pay off. In July, Microsoft surprised investors, saying that it would take a charge that wound up totaling $1.06 billion to cover defects in the Xbox 360 and extend its warranty on the popular game console. Later that month, Peter Moore, the Microsoft vice president in charge of the videogame division quit to join game publishing titan Electronic Arts Inc.

********************

People familiar with the matter say Bungie's game creators bristled under the control of Microsoft. Microsoft executives operated Bungie somewhat independently, allowing the unit in 2005 to move off Microsoft's campus in Redmond, Wash., to an office in nearby Kirkland.

Microsoft's money-making goals have been seen by some game creators at the company as hampering their freedom to try new game concepts.

In an interview Friday, Harold Ryan, Bungie's studio head, described the positive "emotional state" Bungie's game developers gain from running their own company. "They want to feel independent," he said. Bungie's 113 full-time employees will remain in the Kirkland office, he said.

Translation: It sucked for Bungie working inside Microsoft. Sure, it was great to get the money back in 2000, I mean, $20-$40 million is a lot of money for a bunch of developer nerdos. They made a rational economic decision - at the time. But creative types tend not to like rigid, overbearing, highly opinionated bureaucracies, and this dynamic caused the mutual benefits wear thin, pretty fast.

Further, it was clear that Bungie was developing valuable IP for which they were likely not getting paid what they should, because every big company's argument is: "The success is largely due to our brand and PR might. Yeah, the game is good but without our backing it wouldn't have been nearly as successful." This is akin to the annual bonus confab that takes place at every bulge bracket firm which goes something like: "Yes, you generated a lot of revenues this year. But let's face it, our brand and franchise value got you a lot of those deals. So really, much of the revenues is attributable to the firm, not your skill." This is a fight that has been going on since time immemorial. But as it is with top teams, be they trading teams or development teams, they ultimately have the hammer. Because they can simply walk and say "No more (games/money) for you."

So while I appreciate Microsoft's stiff upper lip in dealing with a situation they clearly would have preferred to avoid, they are trying to make the best of it. Just like when I'd spin off a trading team that I'd rather keep but hey, better to preserve the relationship and extract some value then to go nuclear and get bogged down with lawyers, fights, etc. So Microsoft did the rational thing. Because they had no choice. Bravo.

Source: Microsoft/Bungie Divorce Was Inevitable