One Decision: Halo 2

The decision: Microsoft released Halo 2, the sequel to its highly successful video game Halo, a year later than customers expected. Though the delay disappointed gamers in the short term, it ensured a better product. It also bolstered the hold of the Xbox game console–part of Microsoft’s bid for a place in our living rooms.

Halo, the revolutionary video game pitting the “Master Chief” against a coalition of evil aliens, helped spark sales of Microsoft’s Xbox game console when both products debuted in 2001. When the company announced in August 2002 it was creating Halo 2, the game was expected to be on the market by the 2003 holiday season. Instead, it would not be released until the 2004 holidays.

Programmers at Bungie Studios, one of Microsoft’s in-house game studios, insisted they needed more time to make the game they envisioned. Halo is a “first-person shooter,” the kind of game that runs the risk of becoming repetitive. Halo avoided that pitfall thanks to a gripping storyline, excellent graphics and sound, and innovative game play. By early 2004, customers were clamoring for Halo 2, and their expectations ran high. “The successor to Halo really had to be amazing,” says Shane Kim, general manager of Microsoft Game Studios. “If we had rushed the game out, we would have had fewer single-player missions, fewer multiplayer maps, and a lot less polish in the graphics and game play.”

That argument alone may not have been enough to justify the delayed release. But Microsoft needed Halo 2 to be wildly successful for reasons beyond the revenues it might generate. That’s because the video game market drives the game-console market, whose major players are Sony’s PlayStation, Nintendo’s GameCube, and Xbox. And whereas a third-party game maker such as Electronic Arts will try to sell a high number of games across different platforms, Microsoft uses proprietary games to drive demand for the Xbox. As Kim explains, “The console with the best games will win.”

Jay Horwitz, a senior analyst with Jupiter Research, says his company’s data lend support to Microsoft’s approach. “When we ask customers the three most important considerations in the purchase of their next game console,” he says, “availability of the best exclusive games consistently ranks highly.” At the time of Halo 2’s release, Sony was dominating the game-console market with its PlayStation 2, and Microsoft was eager to capitalize on the success of Halo to increase its console market share. A much improved Halo 2 would help in that effort.

But the market for game consoles is about much more than games. Microsoft continues to develop its Media Center operating system, which allows a computer to be a TV, DVD player, photo editor, and digital jukebox–and the upcoming release of the Xbox 360 will make connecting to a Media Center PC even easier. As Bill Gates recently told CNET, “We didn’t do Xbox just to do a video game; we did it to be part of our vision of the digital lifestyle.”

Of course, Microsoft delayed Halo 2 not just because it felt it had to, but also because it could. Microsoft doesn’t face the same financial pressures that most other game companies do, and its strength allows it to base narrow decisions, such as release dates, on broad strategic goals. “Winning the console market is a marathon for them. It’s not measured on a quarterly basis,” says Jupiter’s Horwitz.

That said, Microsoft did see a short-term benefit from delaying Halo 2. When the game shipped, it was an instant success–in terms of both its own sales and those of the Xbox. According to the NPD Group, Halo and Halo 2 were both among the 10 top-selling video games of 2004, even though Halo 2 was released in November (Halo 2 brought in $125 million the first 24 hours it was released). The new game won dozens of industry awards and helped drive two million people to Microsoft’s online game site. All that helped Microsoft’s Home and Entertainment (read: Xbox) Division close out the year with its first quarterly profit, of $84 million on $1.41 billion in revenue. In the first quarter of this year, however, the division lost $154 million on $593 million in revenue. Things could get back on track later this year, with the Xbox 360 scheduled to be released for the holidays.

It’s tricky to draw lessons from Microsoft, which operates in a strategic universe all its own. But the Halo 2 story underlines a big question for any company deciding whether to ship an acceptable product on time or a better product late: is a delay justified by an imperative greater than the short-term sales of the product itself? That question gave Microsoft pause.

Bick, now a freelance writer, worked in product management for Microsoft from 1990 to 1995; her husband works for the company now.