As we examine the Xbox story, we see a difficult, often contentious, but steady movement toward the concept of a Microsoft game console system. However, just because people were talking about and ultimately developing that console, doesn’t mean that other options were being ignored. One such option that Bill Gates favored was somehow convincing Sony to use Windows technology to drive the PlayStation 2, and he did arrange meetings with Sony execs on several occasions. Of course, that didn’t work. After all, why should Sony pay a percentage to Microsoft when they had already developed their own operating system? Another strategy that took a little longer to resolve was simply to purchase another company.
Buying Sega
One company that Microsoft almost purchased was Sega. According to longtime industry veteran Bernie Stolar*, the deal was already on the table. “Actually, I went to sell Sega to Microsoft, but Mr. Okawa screwed that up. Sega could have gotten sold to Microsoft—the deal was cut—but he went back again, twice, to get more money, and Gates finally said no.”
*Bernie Stolar was president of Atari from 1990-1993. He was an executive vice president at Sony Computer of America from 1993-1996, and was president and COO of Sega of America from July 1996-August 1999. He was also president of Mattel from January 2000-December 2002. He held several other chairmanships after leaving Mattel and even spent a year and a half as a games evangelist for Google.
According to Bob McBreen, who was involved in this and other purchase negotiations, there was considerable tension between the two companies, aside from the purchase price. He recounts the story of a secret meeting at Microsoft that occurred in the midst of the negotiations. It was a Sunday, and the meeting began at Red West around 6pm. Part of the problem was that Microsoft had sold Sega on the idea of using Windows CE to create an operating system for their upcoming Dreamcast console. But once word of the Xbox became known, it soon became clear that Xbox would be a more powerful console. Their perspective, according to McBreen was, “They had just built their Dreamcast on this Windows CE reference design for gaming, and it was so underpowered compared with what we were doing with Xbox, they were basically paying Microsoft a per-unit royalty on CE for Microsoft to put them out of business.”
Meeting with Bill and Okawa-san
Chris Phillips recounts a story about a special, and poignant meeting between Bill Gates and Sega’s chairman, Isao Okawa, who was also the chairman of the Okawa Foundation, founded in 1986 and dedicated to providing grants and support for the promotion of information and telecommunications. “I was the only person in the room, I think, who knew that he was dying of cancer. He was the chairman and CEO of CSK, and he owned Sega. And that was one of the most surreal meetings in my life.” Microsoft was already working on Xbox at the time, but the idea of acquiring Sega was still under consideration, if only to acquire their development teams. But Okawa’s motivation was somewhat different.
“Okawa wanted to leave a legacy to Japan, and really wanted to keep making another mark, even posthumously, on technology and Japan. He wanted to build a Dreamcast 2 type thing with us, as an alternative idea to doing Xbox. It’s kind of a crazy meeting to be in a room where people are throwing around billions of dollars like we’re at Vegas and ‘I’ll put up X billions and you put X billions, and we build…’ you know, the entertainment console of all entertainment consoles. And it was a surreal meeting. Here was a man that could see death, and was basically willing to put down monster bets, just throw it all on the table.
“At that time, Bill, I think, said ‘I don’t know how well we’re going to do this [meaning Xbox]. We don’t know what we don’t know, but we’re heading forward, and hopefully we won’t totally screw this up.’ Which was very Bill-ish. I mean, like there are times like that where I also could learn a lot just watching Bill and listening… You know, Bill could put a deal aside in an instant for business. Watching him do deals, or his behavior in listening to proposals just taught me a ton.”
Another company Microsoft tried to acquire was Square Soft. According to Rick Thompson, “We actually made a run at trying to buy Square. We were interested in buying Final Fantasy and make our own franchise. It went all the way to the point where Ballmer actually met with them, but the numbers they came up with… They wanted something like one and a half billion dollars for half of the company. So that never happened.”
Bob McBreen was at the meetings with Square Soft in Tokyo. It was November 1999. There was a deal on the table and Steve Ballmer, who was in Japan on a sales tour, attended a celebratory dinner the night before the final meeting. The next day, everyone was gathered in a conference room, ready to sign papers. “Then Suzuki* stood up and said, ‘Before we sign, our banker would like to say something.’ And the banker got up and basically said, ‘We want more money.’ They just about doubled the price. I forget exactly what we were going to pay for them, but it was serious money. It was definitely in the billions. And their banker got up and said, ‘After reviewing this deal, we realize that there are some errors in the numbers, and we’d like more money.’ And we asked them, ‘What did we miss when we did our due diligence?’ And they basically came back and said, ‘You missed that we’re worth more money. We want more money,’ and both sides walked away from the deal.”
*Hisashi Suzuki—president and CEO from 1995-2001
Buying Nintendo
Rick Thompson also relates another potential purchase—Nintendo. Even while he was working on the Xbox, Thompson was still looking for alternatives. “The Microsoft DNA is very much a DNA of ‘let’s build it ourselves, screw everybody else, we don’t need any help…’ that kind of mentality, but I kept looking at it and thinking the only company who is any good at this business is Nintendo. I loved Nintendo’s model because they had Miyamoto, and they kept the game development business in-house, and they bullied the third-parties. Like when Zelda came out, everything else had to get out of the way. When Super Mario Bros. came out, everything else had to get out of the way. They understood the business deeply, and their first-party title business was remarkable. And they had that Japanese system where a guy like Miyamoto would never leave Nintendo. So I visited Nintendo seven times. Back then, the Nintendo of America offices were about 300 yards from my offices in Redmond at Red West, and I would literally walk across a dirt field to visit Howard Lincoln and the rest of the guys over at Nintendo. So between visits in Redmond and visits in Kyoto, I visited them seven times, and in my ugly American way, I just came right out and said, ‘I want to buy you guys.’ And they would say, ‘We’re not for sale.’ So I got some of my Japanese buddies to do proper introductions to meet the guys in Japan, where I got instructed. The Nintendo company was started in 1889. They used to make playing cards—handmade playing cards. The guy who runs this thing, Yamaouchi, is 80-something years old and is the great grandson of the founder, and you’re not going to buy this thing come hell or high water.
Rick Thompson visited Japan so often, that he was even featured in a story in a Japanese magazine
Don Coyner’s comment about the trips to Kyoto is, ‘Yeah, we went to Kyoto and had that conversation. I think they were just confused. ‘Huh?’
“We did talk with a guy there, Takaeda-san,” says Thompson, “who’s still there making hardware for Nintendo. Takaeda came to Redmond a couple of times, and we talked about trying to build a joint box—basically their hardware design and our operating system. We got pretty far on it, but we could never quite get there because we both basically wanted to be in charge of the project.
“I used to drive the guys crazy because all they wanted to do was invent the future, you know, typical classic Microsoft guys, and I was kind of the anti-Christ going out to Nintendo and saying I’d rather buy them… In my mind we should have paid $25 billion for the company, rather than start this from scratch internally.”
McBreen, who was also involved in negotiations with Nintendo, remembers several serious discussions. “We basically made the pitch to them that they weren’t great at hardware. They were great at characters. And first we looked at buying them, and they said no.” That might have been the end of the story, but apparently Nintendo was still interested in some kind of partnership. “I remember I was at the Red Robin in Redmond Town Center on a Friday night, and I got a phone call from my contact at Nintendo USA who told me that Mr Yamauchi wanted to start negotiations again. And so we negotiated with them for a little while. Rick actually went over to Kyoto.
“Later we disclosed the entire hardware design of Xbox to their engineers to see if it made sense to work with us. They spent three and a half days in Red West going through all the technical implementations of the design of Xbox. Xbox was no surprise to Nintendo. They knew when it was announced. I have faxes going back to Mr. Yamauchi about potential joint partnership between the two companies. So when Xbox was announced, they knew everything about the technical details. They had spent two and a half days in a conference room with their best engineers.”
McBreen also remembers some specific elements of the negotiations. For instance, Microsoft was proposing that Nintendo would get out of the hardware business altogether and publish on Microsoft’s hardware or through a joint venture. Nintendo could produce a certain number of royalty-free games per year, with the rest being at something like $9 per game. McBreen says, “It was very favorable to them, but in the end they basically came back and said—they were very Japanese about it—that no matter what the deal, how favorable it was to Nintendo, it would look like they had lost to Microsoft in a space where they had history and we had none. It was going to be a Microsoft product that would be endorsed by Nintendo. But the deal on the table was that they were going to get out of the hardware business, and Xbox was going to be the exclusive platform that Nintendo games played on.”