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Microsoft dances with H'wood: studios wary of tech giant's strategy as showbiz connections deepen.

Does Hollywood need Microsoft, or does Microsoft need Hollywood?

Just who needs whom is at the heart of the relationship forming between the biggest tech company in the world and the entertainment capital of the world as the two sides take the first tentative steps toward linking together.

As studios move into the digital world, Microsoft wants its technology to drive the process. It has spent a bundle on entertainment--including $1 billion on antipiracy software, $10 billion on cable investments, and $2 billion to establish its Xbox vidgame system, with billions more likely to come.

Microsoft has often had strained relations with the entertainment industry. Last summer, in an effort to transform itself from a misunderstood interloper into an indispensable ally, the software giant hired former Universal TV topper Blair Westlake to oversee its new media and entertainment group.

At the same time, with one of the two most popular vidgame franchises in the world under its control in "Halo," Microsoft has become a potentially valuable partner. Every studio in town was eyeing a "Halo" movie, though it now appears Fox and U will land it after an aggressive script sale that alienated some previously interested execs.

While Microsoft and the big studios are talking more than ever, the two sides see their relationship in very different ways. Studios view movies as the center of the universe, with vidgames and digital media mere ancillaries.

But to Microsoft, showbiz is a means to an end: selling more software and vidgames. Westlake's group spends its time developing standards and processes for digital media with the aim of putting more content in what the company calls its "Windows ecosystem" and thus, ultimately, selling more computers that run on its operating system.

Microsoft wants to make a "Halo" pic solely to sell more games. It's certainly not for the money. Even with a $5 million advance against 10% of the gross, as looks likely in the evolving deal with Fox and U, licensing revenues will be peanuts compared with the $600 million-plus "Halo" and "Halo 2" have raked in, not to mention future sequels.

"We don't really need a movie," notes Peter Moore, veep of worldwide marketing and publishing for Microsoft's Xbox division. "But we do need to broaden the demographics for videogames. Movies can do that because they reach deeper into our culture."

Company is hopeful that a hit pic will do just that. If all goes well, strong talent and good reviews could draw a broad audience into theaters and some "Halo" novices will leave eager for more, which means they'll buy the game.

That's important to Microsoft because it's looking to make the soon-to-launch Xbox 360 console, on which "Halo 3" will play, a hit by drawing a broader aud rather than just stealing market share from competitors Sony and Nintendo.

The Xbox 360 isn't just a game console, but a complete entertainment center that can download and play digital music and pictures and transfer content with PCs and portable devices--so long as they run on Windows, of course.

Tech giant has been approached by studios and producers about making a "Halo" movie since the first game hit big in 2003. Some even went right to the top, with execs pitching deals directly to chairman and co-founder Bill Gates.

But it wasn't until "Halo 2" launched as one of the biggest vidgames in history, with $125 million in first-day sales, that the company was ready to turn its attention to a movie.

Rather than take one of the many licensing deals that came its way, company tapped former Columbia production prexy Peter Schlessel, who worked with Microsoft entertainment group chief financial officer Bryan Lee when he was exec veep biz affairs at the studio, to serve as a producer.

And using connections through CAA, which reps Microsoft's game division, it paid "28 Days Later" scribe Alex Garland $1 million to pen a script in close consultation with execs and developers at subsid Bungie Studios, which produced "Halo."

Just seven months later, Microsoft turned a quiet inhouse project into a big Hollywood event, sending messengers dressed like Master Chief, the space marine character from "Halo," to studios on June 6 with copies of Garland's script and an aggressive set of demands for financial participation, creative control, and a quick production start.

Some didn't take well to the high-profile stunt, with New Line, DreamWorks, Paramount, Warner and Disney all passing within a day (Sony wasn't involved as its PlayStation competes with Xbox). A senior production exec at one studio who passed expressed a common sentiment when he said he wasn't inclined to even negotiate demands for a script that didn't impress him.

But with most of their competitors out, Fox and U teamed up. The only remaining points on their deal are Microsoft's creative control, according to sources close to negotiations.

Some see Microsoft's approach as arrogant and say it reveals a disconnect from the way Hollywood works. But defenders say the reason critics are carping is an outdated view that the "Halo" maker is only skilled at Excel upgrades and doesn't have creative expertise.

Digital thrust

Microsoft is hoping industryites will separate the film offensive from the company's work on digital media issues, where it has purposely taken a more accommodating attitude in the past year. Though Microsoft has invested heavily in antipiracy protection and software to distribute video over the Internet, many studio execs found the software geeks in Redmond, Calif., ignorant of the way they did business.

Westlake was tapped to head a newly created media and entertainment group last year specifically to address that problem. His charge, along with the roughly 30-person group he heads, is to get along with showbiz.

In practice, that means a lot of boring meetings on issues like compatibility standards for moving digital media between devices, as well as persuading reluctant studios to make more movies and TV shows available online and with more flexible terms for consumers.

Concrete results, however, are for the most part still far off. Microsoft has signed much-publicized strategic alliances with Disney and WB in 2004 and 2003, respectively, to work together on digital media initiatives. In practice, however, industryites view those deals as mostly hype, as every studio regularly talks to the tech giant and neither pact has resulted in new initiatives or products.

Most insiders admit to being a bit wary of working too intensely with Microsoft, since the last thing studios is to be at the mercy of a single software company, especially one that has already raised anti-trust concerns in the U.S. and Europe.

But those who regularly deal with the company say that under Westlake. Microsoft has acknowledged that it is just one player in the digital media world and it has actively taken part in initiatives and standards groups that include competitors like HP and RealNetworks.

"Microsoft has, for some time, been interested in becoming the focal point of the home entertainment experience and has been pushing the industry to make its content available in ways to hell) make that happen," observes Chris Cookson, technical operations prexy at WB. "Recently, they have become more knowledgeable about our industry and much more flexible and collaborative."

Not only was Microsoft "Halo 2" one of the five top-selling games last
year, its 2001 predecessor continued to sell well in 2004, with more
than 1 million units moved.

Top-selling vidgames in 2004

Game                Units sold *

Grand Theft Auto:      5.1
San Adreas

Halo 2                 4.3

Madden                 4.2
NFL 2005

ESPN                   2.6

Need for Speed:        2.4
Underground 2

Source: NPD Group

* in millions

Note: Table made from bar graph.
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Author:Fritz, Ben
Geographic Code:1USA
Date:Jun 27, 2005
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