Microsoft, "Halo" maker Bungie split

For years, the artists and designers responsible for the smash hit "Halo" video-game series chafed under the constraints and culture of their much-larger parent company.

On Friday, Microsoft and "Halo" creator Bungie Studios announced plans to amicably part ways. The split was effective Monday. Microsoft retains all rights to "Halo," a franchise of first-person shooter video games credited for the success of its Xbox video game business and expected to break $1 billion in total sales by year's end. It will also maintain an undisclosed minority equity interest in Bungie.

The 113 game developers toiling in an unmarked building near Kirkland's Peter Kirk Park get back their creative freedom and sense of independence.

"Bungie has long been built on creativity, originality and the freedom to pursue ideas," read a post Friday morning on Bungie's Weekly What's Update. "Microsoft agreed, and rather than stifle our imagination, they decided it was in both our best interests to unleash it."

Harold Ryan, head of the game studio, elaborated in an interview Friday. Bungie was a small team when it became part of Microsoft, he said. The creative professionals who worked on the "Halo" franchise were "used to being able to look around the room and see Bungie people." They "feel lost" inside of the much-bigger organization of Microsoft Game Studios and, despite the success of "Halo," "that desire to be independent is something that a significant number of the people on the team still felt lacking," Ryan said.

At the same time, Bungie is keeping a link to Microsoft: For the foreseeable future, it will develop titles for Microsoft's Xbox 360 and the personal computer. Microsoft Game Studios will publish those titles.

In addition, Microsoft will continue to invest in Bungie, which is expanding — at Microsoft's expense — to an adjacent building in Kirkland.

Microsoft did not disclose financial details of its 2000 acquisition of Bungie, and specific terms of this week's separation were not disclosed, leaving analysts and observers to speculate.

"I'm sure that the Bungie part of the [2000] deal was some sort of share of the ['Halo'] franchise when they came over to Microsoft," said Billy Pidgeon, a gaming-industry analyst with IDC. "[Bungie] may have traded some of that equity off to get some of that independence. Maybe they're just tired of turning down offers or ideas for other platforms."

At some undisclosed time, Bungie will be free to make games for Xbox competitors such as the Sony PlayStation 3 or Nintendo Wii, though Ryan said the studio currently has no plans to do so. Still, that prospect could reinvigorate game developers who have been working for close to a decade on "Halo" for the Xbox.

"Often it's really a breath of fresh air to work on a different genre and a different platform," Pidgeon said. "[And] it's good news for PS3 owners, for Nintendo owners and maybe for Mac owners."

(Bungie got its start in 1991 developing games for Apple computers. The original "Halo: Combat Evolved" was being developed for the Macintosh platform when Microsoft acquired Bungie and made the game an exclusive launch title for the original Xbox.)

Veterans of Microsoft's games business said they weren't surprised at all by the move, which insiders suspected for years.

Tom Edwards, who was involved with the first two "Halo" installments from the Microsoft corporate side and is now a consultant in Renton, said it seemed inevitable ever since Bungie moved out of Xbox headquarters at the Millennium office complex in Redmond in 2005 and into the Kirkland building.

Assessing Bungie content on behalf of the parent company, Edwards saw firsthand the friction between the two cultures. He recalled Bungie developers being resentful — not of his assessments, but just because he was doing so on behalf of the corporation.

Shane Kim, head of Microsoft Game Studios, would not specify what the company did to persuade Bungie to stay within the Microsoft fold.

"We're always in discussion with all of our studios and our partners about how do we make the relationship stronger," he said. "... This particular path was something that was such a strong desire for Bungie that, you know, in the end, I decided it was in our best interests to support this."

He said the separation agreement is "great for both parties and enables us to preserve all of our interests."

While Microsoft's Xbox business and broader Entertainment and Devices Division (EDD) have consistently lost money, analysts estimated that Microsoft is probably turning a healthy profit on the Bungie deal, even though the dollar amounts involved hardly register at a company with $51.1 billion in annual revenue.

"I don't know exactly how much Microsoft paid the first time around, but I imagine that they've gotten their investment's worth out of it many times over," said Matt Rosoff, an analyst at Directions on Microsoft.

The divestiture and the shedding of payroll expenses don't signal an effort by the division to reach its goal of profitability this fiscal year, Kim said.

The company wants to continue attracting talent. Microsoft may still buy other studios to develop such games in-house, he said.

Even as they go separate ways, Bungie and Microsoft will continue collaborating on a project with movie director Peter Jackson based on the "Halo" universe. Likewise, "Halo Wars," a real-time strategy game, is still going forward, Kim said.

"We own the 'Halo' [intellectual property] and our intent is to continue investing in it and growing it," Kim said.

Ryan said many people at Bungie remain interested in the franchise, despite the huge amount of time they've spent on "Halo" to date.

"If it's a labor, it's a labor of love for building 'Halo' games and it's something that we don't want to distance ourselves from," he said.

Bungie, which had a portfolio of several other successful games including "Myth" and "Marathon" before "Halo," is again expected to create other titles. Despite the high cost of modern video-game development — analyst Pidgeon said games now cost in the tens of millions and "Halo 3" could have reached as much as $30 million — Bungie has no financial worries as it again becomes independent.

"As the developer/originator of the 'Halo' franchise, it's fair to expect that we have no problem getting backing on the next games we would do either internal to Microsoft or as an external developer," Ryan said.

Seattle Times senior technology writer Brier Dudley contributed to this report. Benjamin J. Romano: 206-464-2149 or bromano@seattletimes.com