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How was working with Stuart Molder?
TG: Stuart was great to work with. He was a true believer in our game and our development team. He stuck behind us, and ultimately convinced Microsoft to bet the farm on Age of Empires.
This turned out to be a game changer for Microsoft. Age of Empires was first of the two monumentally successful franchises that gave rise to Microsoft as a worldwide video game powerhouse.
For several years, Age of Empires was responsible for as much as 50 percent of Microsoft's game revenue. In 2001, Bungie's Halo would launch Microsoft to even greater heights, leading to their dominance in console games.
Although we relinquished the Age of Empires intellectual property to Microsoft in our first deal, we were still able to maintain significant negotiating leverage for future versions of the game. This was due to the technical complexity of our game. It would be extremely difficult for another developer to faithfully reproduce our gameplay experience. This ultimately led Microsoft to acquire us in 2001.
What do you mean by "technical complexity"? What would make reproducing the gameplay experience difficult?
TG: We built our own proprietary engine, and there were many components that were very difficult to reproduce. One extremely complex part was our pathing algorithms. When you click on a unit and it needs to move somewhere, it must find the most efficient path from point A to point B. When scores of units are moving at once, each unit's moves can block or unblock potential pathways for any other unit. We literally had hundreds of units moving all at once, and all of them were potentially affecting every other unit. As a result, the routine became extremely complex.
Another very difficult problem was computer synchronization. You can have up to eight players in a game, and each player might have 50 or more units move around at once, yet all eight computers needed to stay perfectly synchronized. This needed to happen 30 times a second. That was an exceedingly difficult network programming challenge. Age of Empires I was even more difficult because we supported this over dial-up connections.
Tell me about the Microsoft acquisition in 2001. Did you approach them about selling?
TG: Shortly after the release of Age of Empires I in 1997, Microsoft approached me on numerous occasions and expressed interest in Ensemble Studios joining the Microsoft family. They made a few lowball offers, but we didn't enter serious discussions until we released Age of Empires II in 2000.
When I founded Ensemble Studios, I resolved to not sell for under $100 million. That resolution may have been more of an aspiration than a calculation, but it became an invaluable metric around which I managed Ensemble Studios.
Age of Empires II
How did you determine that figure?
TG: Your company is worth only what you can convince someone to pay. To do this favorably, you must address three factors: revenue, which determines a minimum value; potential, which determines a maximum value; and time. To close the sale, you need to create a vanishing window of opportunity.
Revenue is determined by financial data. A company is minimally worth some multiple of its profitability. Age of Empires II was on its way to becoming the bestselling PC game of all time, so our financial health was outstanding.
Potential is determined by strategic synergy. A company's maximum worth is the benefit it brings to the acquirer. Prior to Age of Empires I, Microsoft had not built a reputation as a top-tier game company. To obtain a premium value for Ensemble, I had to convince Microsoft that purchasing Ensemble Studios would redefine their image in the world of video games.
And to control the sale, you need to control the timing. Cash-rich companies can afford to take their time. They will always hold out for a better price if nothing motivates them to close. To create a deadline, I had decided to work with a new publisher for our next game. This gave Microsoft two options: buy our company or compete with us.
Why did you sell? Was Ensemble not doing well?
TG: Ensemble was doing fantastic. The best way to leverage success is with a powerful strategic partner, like Microsoft, who benefited from the deal. We were the perfect match at that time.
There are typically two types of sale: fire sales and strategic acquisitions. The first type, a fire sale, occurs when a financially troubled company is willing to sell for cheap in order to avoid bankruptcy. The second type, a strategic acquisition, is a premium-priced sale that occurs when the acquirer needs something that the acquired has in order to complete some larger strategy. Our purchase was strategic for Microsoft at the time, as they needed us to take them to the next level as a game publisher.
We determined that there was an excellent fit between us and that we both benefited from the acquisition. Then we engaged in a lot of negotiation regarding long-term commitments, strategic plans, franchise direction, control, and key people. In the end, it all came down to the sale price. I had to draw a line in the sand. Finally, many months after negotiations had started, Ed Fries and I agreed upon a final acquisition price during dinner at the Third Floor Fish Café in Redmond, overlooking Lake Washington.
That said, I've always had a passion for games, but even more so was my desire to build something great and enduring. It was a tough call to sell Ensemble. The company was my prized possession, and I had a deep attachment to the family I had built. I nurtured the employees, giving them opportunities that they wouldn't have had otherwise. I wanted to enrich my own life by enriching the lives of my employees.
My philosophy at that time was to give out stock options to align the goals of employees and management. Too many times have I seen companies whose owners make a lot of money and the employees get nothing. In those cases, selling is only good for the owners. So, I had created a stock option plan where all of the employees benefited from a successful acquisition. That aligned everyone's long-term goals. I knew that it was time, and I felt that I had achieved that success.
How did you feel about losing ownership of an organization in which you invested a great amount of time and resources?
TG: No one likes losing ownership of something like that. Parents don't like seeing their children go off to college, but it is a necessary part of the life cycle. Microsoft underwent some bad experiences with acquiring companies and trying to control them, so they were in a good mindset to acquire us and allow us to maintain the formula that made us successful in the first place. They were ready for hands-off management.