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The video game Halo 3 earned $300m at the cash registers during its first week of release.  It earned more than $170m in its first day.  That easily trounced the all time best opening day box office returns for the movie industry (Spider-Man 3 earned $59.8m (source: Box Office Mojo)).  That makes Microsoft’s announcement today to spin off Halo’s creator, Bungie Studios, seem curious at first glance.  On a second look, it’s not actually that surprising.

Game Development is a little bit like movie production and venture capital.  For every hit, there are dozens of failures.  Companies spend extreme sums of time and money developing projects all the while knowing full well that many of the efforts will ultimately have to be supported by a few leaders in the portfolio.   Since its formation in 1991, Bungie has had great success with titles like Myth , Marathon and the Halo franchise.  They’ve also had failures.  (Example: Oni, a game released in 2001, a year after Microsoft bought Bungie, had debugging issues and, though popular with some fans, wasn’t a huge success.  The IP was eventually sold to Take Two Interactive which also bought the rights to Myth in 2000).

Spinning off Bungie Studios but retaining some ownership stake in new creations and control of older IP can give Microsoft some balance sheet benefits.   Research and Development costs, for instance, will no longer be liabilities on Microsoft’s back. Spinning off Bungie also won’t erase revenues.  Microsoft will still earn substantial license income and revenue sharing from games sold for play on the Xbox platform.   Through the spin off they’ll be poised to derive investment benefits from successes without the expenses of testing and building new product.   Moving Bungie Studios to independent status changes accounting but it doesn’t erase all the rewards. 

For Bungie Studios, the move also has benefits.  First, as a smaller independent entity, free of the regulatory filings and management bureaucracy involved in a public company, they will likely be able to operate more efficiently and with less scrutiny.  Second, performance incentives for staff and management will take on a 1:1 correlation with their efforts rather than being a tiny slice of the enormous Microsoft pie.   3rd, as an independent company, Bungie Studios will presumably get leeway to develop titles for other platforms.  In the future they could direct titles toward the Nintendo Wii (or DS), or Sony’s PlayStation lineup; at least in theory.  That takes Bungie back to their roots. Originally, and for much of the company’s first ten years, Bungie’s gaming focus was on Apple Macintosh computers.  The first version of Halo was even introduced at an Apple event.  By spinning off, the combined elements creates a situation where all involved have the potential to gain.

According to the limited terms announced, Bungie Studios become Bungie Studios LLC.  Microsoft will be a minority owner.  The Halo franchise will remain entirely with Microsoft.  In fact, a future version called Halo Wars is already in development at Ensemble Studios, another of Microsoft’s in-house gaming studios.  (Ensemble is known for the Age of Empires series.) 

In a soundbyte, head of Bungie Studios Harold Ryan said “this exciting evolution of our relationship with Microsoft will enable us to expand both creatively and organizationally in our mission to create world-class games. We will continue to develop with our primary focus on Microsoft’s platforms; we greatly value our mutually prosperous relationship with our publisher, Microsoft Game Studios, and we look forward to continuing that affiliation through ‘Halo’ and beyond.”

In other gaming news:

Electronic Arts today announced the acquisition of Super Computer International (SCI), an Atlanta company that builds pc gaming tools and applications.   SCI’s PlayLinc platform, in particular, provides messaging and Web 2.0 like features for online games.  Inside EA, as part of their Online Technology Group (run by Nannea Reeves) the SCI technology will likely be implemented into MMO games and other EA casual games initiatives.

Related Metue content:

• Gaming industry statistics:  1. Retail Sales 2. Misc Stats
• State of the Gaming Industry
• EA’s Casual Games efforts
• EA’s Dynamic Gaming Experiments