Sunday, June 12, 2005

Microsoft & Hollywood: Did Anyone Think Win - Win?

When Microsoft released Halo 2 last year and racked up Hollywood-like box office numbers in its first week of release, it's easy to understand (and forgive) if the execs in Redmond experienced a little rush to the head and perhaps a momentary lapse in judgment believing that the market value of their videogame title "should" be equated to proven box office brands like Spielberg and Cruise or franchises like Star Wars or Spiderman. Surely, once the blush was off the rose and the champagne uncorked, cooler heads would prevail and recognize that, while Microsoft had in fact created a blockbuster videogame, that fact in no way should give the software giant the license to negotiate with Hollywood with the same hubris it displays as the dominant player in the software industry. Wanna bet?

As reported in the June 10th edition of the NY Times, Microsoft's MO was on full display in the disclosure of how it went about negotiating film rights for Halo 2 with the major studios. Rather than recognize (and perhaps humbly submit) that Microsoft was a new kid on the block in Hollywood and, using the bait of an admittedly valuable property, attempt to build long term sustainable relationships with worthy partners who shared their passion for marketing great games, Microsoft elected to play hardball. The Times reported that Microsoft hired a writer to write the screenplay for the Halo movie, invited execs from the major studios to read it and then offered the following terms: The studios would have 24 hours to provide a signed commitment to produce the screenplay Microsoft commissioned, pay a $10MM advance (non-refundable), invest a minimum of $75MM in production (not including actors fees), pay 20% of box office receipts, and pay all travel fees for up to 60 Microsoft execs so that Microsoft could maintain creative control during production. Oh, and for the privilege of producing the movie, the winning bidder foregoes all merchandising rights.

Predictably, once hearing of these terms, 4 of the 6 potential studios dropped completely from the bidding. The Times reported that the two studios who chose to bid, Fox & Universal, submitted terms that equated to half of what Microsoft demanded and have yet to sign an agreement as both sides consider further concessions.

Beyond the sport of Microsoft bashing-- one in which I rarely partake- not to mention the hubris that one can only assume is attached to such an aggressive posture, this episode particularly intrigues me because, if the Times reporting of events and terms are accurate, it appears the folks at Microsoft engaged in some of the most ill-conceived negotiating strategies ever recorded.

Did the person in charge of the negotiations at Microsoft pause for a moment to think that maybe they didn't know the highest value the film rights to this popular game title could command in an open bid market? Did anyone consider that a $10MM advance was too low? Did anyone consider that the titans of Hollywood, who perhaps know one or two things about what it takes to produce a blockbuster movie, consider Microsoft's requirement for "total creative control" as unacceptable? Did anyone think that maybe Microsoft should take the long view and-- assuming Microsoft is confident they will have a string of hit game titles worthy of future development-- engage potential partners in Hollywood with a little more--dare I say-- respect?

In short, did anyone think win-win?

Apparently not. Sure, in the end maybe securing 50% of everything they demanded will satisfy Microsoft so they can claim victory. But, one of the cardinal rules of negotiating is never let the buyer be the one to say "no" to your terms; the seller should always have the last word and say "yes" or "no". Microsoft's obscenely one-sided posture from the outset predicated the buyer would say "no" and Microsoft would have to respond lest they lose the deal (and since 75% of the eligible bidders dropped out, the "no's" were heard loud and clear). Hence, Microsoft may claim victory, but they will never know if they got the best deal. They will never know if they got the best partner. They will never know if they got the best terms. What they got was a reputation that will not serve them in obtaining better terms in the future. What they got was a deal valued at 1/2 of what they wanted. What they got is the deal to which all parties ultimately said "no."

Too bad. It could have been a win-win.

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