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October 15, 2007 // 9:41 pm - Three is a trend, or so the saying goes among journalists. So what are we to make of the steady exodus of highly acclaimed developers from the warm embrace of Microsoft Game Studios into the arms of others? Last Thursday's news that Electronic Arts had acquired BioWare Pandemic from Elevation Partners for nearly $800 million marked the third time in just three weeks that a top developer of multiple Xbox games has jumped ship. First, on September 26th, Activision announced that it would be purchasing the previously-independent U.K. studio Bizarre Creations, which made four Project Gotham Racing games for MGS between 2001 and 2006. A week later, rumors began to mount that Bungie–the brightest light in the MGS firmament by virtue of its three best-selling Halo games and the only one of the three Killer B's actually owned by Microsoft–had repurchased its independence from the Redmond giant.

The rumors proved true, and by the end of the week, both parties released statements attesting to that fact. When EA made its announcement not even a week later, that BioWare–makers of the MGS titles Jade Empire and the forthcoming Mass Effect–and Pandemic would be joining its Murderer's Row, much of the focus was on whether or not EA overpaid (we'll tackle that in a subsequent post) and was it good or bad that EA's already formidable power was spreading unchecked throughout the industry like the baleful Eye of Sauron. Left relatively unexamined, with the exception of a few message boards, fansites and podcasts, was this: what does it say about Microsoft Game Studios that three of the industry's most renowned developers have slipped through its fingers in less than a month's time?

We put that question and several others directly to Microsoft immediately following the announcement of Bungie's departure, which resulted in the following exchange:

With FASA being shut down, Bizarre being acquired by Activision and Bungie going independent, what does this turmoil say about the current state of Microsoft Game Studios?

MGS is in a great position. At MGS, our charter is to cultivate the best individual development relationships and to nurture creative freedom for each of our developers. In terms of Bizarre Creations, they have been a great partner for MGS. They've built an amazing franchise in PGR for Xbox and they continue to work on downloadable content for PGR 4.

That's one way to look at it. For us, the flight of the Killer B's is a clear indication that Microsoft as a whole is still shell shocked not only by the massive losses in the Xbox division, but also more importantly by the poor showing of Rare, which has to rank as not only one of the Microsoft's least successful purchases, but as quite possibly the worst acquisition in the history of gaming.

Microsoft paid $375 million in cash for Rare, and based on the modest revenues from its ensuing titles--a Conker's Bad Fur Day remake, Grabbed by the Ghoulies, Kameo, Perfect Dark Zero and Viva Pinata--all they've got to show for it is that proverbial lousy T-shirt, completely stained with red ink. By contrast, in what Microsoft acknowledges is one of its most profitable investments, the company is believed to have paid just $35 million for Bungie, or 10 times less than it paid for Rare.

That injustice alone would have been enough to propel even the staff of Level Up, for whom $35 million would represent instant retirement and then some, to look for the nearest exit. (As we said in January upon the announcement that the Stamper brothers had finally exited Rare, "We've long believed that the folks at Bungie, upon learning that stablemate Rare sold for about ten times as much as their company, should have staged a sick out during the making of Halo 2 until Bill Gates coughed up a lot more loot.")

Since the Rare debacle. Microsoft hasn't had the stomach for anymore massive acquisitions or perceived underperformers, especially those put in place by the Ed Fries regime. Instead, under corporate vice president Shane Kim, MGS has seemed more focused on dropping big name developers (Tim Schafer's critically acclaimed but merely modestly successful Psychonauts was allowed to go to Majesco, while EA took on Lorne Lanning's similarly received Stranger's Wrath), selling off peripheral studios (MGS got out of sports and extreme gaming) and shutting down internal studios that weren't cutting the mustard (R.I.P. FASA Interactive, makers of Crimson Skies and Shadowrun).

MGS did purchase Lionhead Studios, but that deal was perceived as much of a bailout of Peter Molyneux's struggling studio as it was the adding of talent and IP. So instead of repeating its mistakes of the first generation and trying to build out a giant internal studio system to rival its chief competitors, MGS has tried to correct its course by relying largely on external developers who have the talent and the proven track record that MGS lacked in-house: Epic, BioWare, Silicon Knights, Real Time Worlds, Remedy Entertainment, Mistwalker and Q Entertainment.

Looking back at the Xbox 360's surprising early lead in this generation of consoles, Kim's strategy was a wise one. MGS needed AAA content, but apart from Bungie, Turn 10 Studios and Lionhead, the company's wholly-owned studios had shown almost no ability to produce those AAA titles and the commensurate sales. By contrast, Nintendo and Sony's internal studios had been delivering the necessary blockbusters for years. So with the cavalry–Halo 3–not expected to arrive until holiday 2007, MGS turned to the aforementioned slew of talented outsiders to fill up its pipeline, allowing a number of them to keep the IP rights to their games in exchange for granting MGS the publishing rights to the sequels. And while some of the games have failed to become blockbusters (we're looking at you, Ninety-Nine Nights and Blue Dragon) others have either surpassed expectations (hello,

Crackdown) or blown past them entirely (look at all that juice, Gears of War!) If, like our hockey-obsessed Canadian brethren, we break this generation up into thirds, MGS' first period performance is looking pretty darned stellar. And when we compare it to the slo-o-o-w PS3 ramp-up of Sony's internal studios and the middling results of Sony's external studios–one modest hit in MotorStorm (prompting Sony to buy Evolution Studios last month) a couple of spectacular misses (Game Republic's Genji and Factor 5's Lair) and the jury still out on others (Ninja Theory's Heavenly Sword)–Kim's stewardship of MGS looks that much better.

However, the recent acquisitions of the Killer Bs–Bizarre, Bungie, and now BioWare Pandemic–strongly suggest that the house that Shane Kim built may rest on quicksand. Take Bizarre Creations: the Project Gotham Racing games have sold more than Forza; Geometry Wars and The Club show that Bizarre is capable of making both arcade games and action games, yet Microsoft somehow let Activision walk off with the studio. BioWare's Mass Effect hasn't even shipped and it's already one of the year's most anticipated games, but EA has made it very clear that it now owns the rights to the Mass Effect IP. What's more, EA isn't known for platform exclusives, so while MGS will still release the first Mass Effect this fall as an Xbox 360 exclusive, we expect

EA to buy out Microsoft's publishing rights to Mass Effect 2 and release the sequel on PS3 and PC as well as 360. (Microsoft won't protest too much lest they anger Sauron the world's biggest third-party publisher.) Bungie and Microsoft remain connected, thanks to Microsoft's continued ownership of the Halo IP and its minority stake in the newly independent studio; we suspect that as a condition of its departure, Bungie has already agreed to make Halo 4. But it's only a matter of time before Bungie starts making games for platforms besides Xbox 360. And if we're not mistaken, Bungie's exit means that Microsoft no longer has an internal studio that makes action games.

As for the other independently-owned insects in Microsoft's specimen jar, there are some similarly troubling signs. MGS failed to re-up Ken Lobb's favorite game ever, Crackdown; developer Real Time Worlds says that the Crackdown team has already moved on to another project. There are already publicly-expressed tensions between Epic and Microsoft over the handling of downloadable content for Gears of War (MGS wanted to charge for it; Epic wanted to give it away to build goodwill among its fans and as an incentive for people to hold onto their copies of the game rather than sell it to the likes of GameStop), and over Microsoft's terms for Games For Windows Live, which would force PC gamers to pay for features that they currently get free of charge. More relevant to this discussion is that as we understand it, Microsoft's publishing rights to Gears of War extend only through Gears of War 2, so we'd expect Gears of War 3 to ship day and date on PS3, PC and 360.

The acquisition of the Killer Bs, therefore, throws further into relief the limits of MGS' first period strategy: it has shown the ability to nurture some massive hits, but not the ability to manage them long-term (Bungie, FASA, Rare) or lock them up (Bizarre, BioWare) for the second and third periods of this console cycle. (Microsoft Game Studios might have had a spare billion lying around to throw its hat in the ring for BioWare Pandemic, but following recent events, we seriously doubt its board of directors would have looked too kindly on another such expenditure in the Entertainment and Devices group–yet another victim stung by the Red Ring of Death.)

We don't pretend that this is an easy endeavor, as the tension between the suits and the talent probably goes back to the primordial tide pool from which we all emerged. And for all of the scuttlebutt about how MGS was stifling Bungie, we're pretty sure that Microsoft has complaints of its own, not the least of which would be, we gave those ingrates everything they wanted–their own off-campus offices, tremendous autonomy, three years of development time, massive ad budgets–and they still walked out the door. (Hey Stellllaaaaaaa!) Nor are these studio management challenges limited to MGS.

Sony, after all, effectively shut down Incognito after Warhawk shipped and lost God of War creator David Jaffe to a startup that will make games for Sony platforms under much the same terms as those newly arranged between Bungie and Microsoft. Nintendo, for its part, struggled with pro sports games during the Gamecube era before finally walking away; what's more, it has yet to build a truly strong studio system outside of Japan. For this reason, we don't envy Shigeru Miyamoto, Phil Harrison or Shane Kim their lofty positions. Their salaries, however, are another matter entirely.

Flight of the Killer B's: What Does This Mean For Microsoft Game Studios?

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