The Halo Effect of Microsoft's Halo

It's been a while since customers lined up outside stores at midnight to buy a Microsoft (MSFT) product. That may change on Sept. 14, when Microsoft releases Halo: Reach, the fourth installment of its blockbuster Xbox video-game series.

Since the first release of Halo in 2001, the alien-invasion-themed game and its appurtenant books, toys, and apparel, have generated $2 billion in sales for Microsoft. That's not including the Xbox consoles and online game subscriptions the games have helped sell. Microsoft expects Halo: Reach to generate more revenue than the series' biggest seller so far, 2007's Halo 3, which brought in sales of more than $600 million. Operating margins on the games hover around 60 percent, estimates Wedbush Securities analyst Michael Pachter.

Halo's value to Microsoft, which had $16 billion in revenue during the quarter ended June 30, is bigger than its numbers suggest. The Xbox is Microsoft's attempt to stake out a spot in the living room—and Halo is only available on Xbox. "It's the reason people own Xbox 360s instead of PlayStation 3's," says Wedbush's Pachter. Says Bonnie Ross, general manager for Microsoft's Halo business: "Halo is the most important entertainment franchise Microsoft has."

Like past installments, Halo: Reach was created by Bungie, the studio spun off from Microsoft three years ago. (Microsoft retains all rights to the franchise.) This time, gamers get jetpacks and outer-space combat. They play as part of a team of biomechanically enhanced supersoldiers called Spartans trying to save the planet Reach, the only thing standing between Earth and an invading alien alliance called The Covenant. "You've got this eternal theme of humans against impossible odds," says Greg Bear, a science-fiction author hired by Microsoft to write a trilogy of Halo novels. "How is this not Beowulf in space?"

Halo: Reach is the last in the series that Bungie will produce; all future Halos will be made in-house at Microsoft. Whether the new game—and any future one—resonates with players depends a lot on Frank O'Connor, a former Bungie employee who stayed at Microsoft after the spinoff. As official guardian of Halo's storyline (his real title is "franchise development director, Halo business") O'Connor makes sure every game and add-on is worthy of the brand. "Franchise fatigue comes when quality drops," says O'Connor, who plays the multiplayer version of Halo online every night, only to get beaten and taunted by teens.

O'Connor guards four top-secret black-and-silver looseleaf binders called the Halo Story Bible. Each contains hundreds of pages laying out the Halo story and universe, including the events to transpire in future games, books, and anything else. When they're not with O'Connor, the binders are stored in a locked metal cabinet in the game studio's offices, which are inaccessible to the rest of Microsoft. Authors working on Halo novels—there have been seven, five of them New York Times Best Sellers—are given sections with just the material applicable to their story. Bear, the sci-fi writer, says he received a ring-bound notebook with 10 pounds of color pages, each bearing a code unique to him so that if it ever gets out into the public, Microsoft knows who to go after.

To help guard against franchise fatigue, Microsoft says it's planning to back Halo: Reach with the largest marketing budget it has spent on a game, though it won't disclose how much. Online ads started on Aug. 23, featuring a dramatization of daily life on the planet Reach the day before the alien attacks. TV spots start on Aug. 29 on ESPN and Fox. The game will also be promoted on bottles of Mountain Dew, bags of Doritos, and in 7-Eleven stores. Microsoft will sell a limited edition Xbox console in brushed silver with the logo of the Halo good guys—the U.N. Space Command—on the side.

The company's Halo ambitions extend beyond the traditional young-male gamer demographic. Already, there are older fans of the books who don't play the games at all. Naturally, there are also rumors of a movie. Halo "has a lot of room to grow," says Phil Spencer, vice-president of Microsoft Game Studios. "Microsoft is a scale company. We are not a niche company. We are not about delighting millions of people, we are about delighting hundreds of millions of people."

The bottom line: Microsoft is counting on the latest installment in its $2 billion Halo video-game franchise to be another blockbuster.

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