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Microsoft Xbox Struggles in Big Hollywood Foray

Sources say the disorganized studio struggles to close deals and lacks a fleshed out business model.

Microsoft Corp.

Last May, when filmmaker Steven Spielberg announced he would create a television series based on Halo, it was a defining moment for Microsoft, the owner of the $4-billion-dollar science-fiction game franchise.

The commitment by the director of “Jurassic Park” and “E.T. The Extra-Terrestrial” signaled the arrival of Hollywood-caliber original entertainment on Microsoft’s next-generation game console, the Xbox One.

On Monday, Xbox Entertainment Studios chief Nancy Tellem will once again tout the “Halo” TV series in a presentation to advertisers and media buyers in New York City as part of the digital media Newfronts. But she will have little else to show of this marquee property some 12 months later. In a preview to the press, she offered no video teaser, no definitive timeline or even an update on its progress.

“We believe that if we’re going to create a show that does justice to the Halo franchise, we had better do it right,” said Tellem. “We are on the right track, and putting together a talented team.”

The slow-grinding pace of the “Halo” TV series is just one of the many challenges the veteran network executive confronts as Tellem attempts to build a digital television network and studio within the plodding technology goliath undergoing its own soul-searching and rounds of executive shuffling all the way up to the top.

After a period of uncertainty, Satya Nadella was named Microsoft’s chief executive in February, ending a months-long search for a successor to Steve Ballmer. Less than two months later, Nadella installed Phil Spencer, the former general manager of Microsoft Studios, to head the Xbox unit — the third executive to hold the post since July 2013.

Interviews with several entertainment industry executives who have attempted to do business with Xbox Entertainment Studios describe an operation with big ambitions to dominate the living room, but one that has gotten off to a rough start.

Sources paint a picture of a disorganized studio that struggles to close deals and lacks a fully fleshed-out business model. This inability to execute has turned off potential studio partners, they say, complicating the process of securing premium content.

“It takes a long time for us to build what we’re building here,” said Tellem, who was named Microsoft’s entertainment and digital media president in September 2012. “It’s not a race, but a marathon.”

Tellem says she’s looking for a breadth of entertainment content, in order to learn what resonates with the Xbox Live audience of 48 million subscribers. Initial programs in development include scripted shows, reality series, comedies, live events, documentaries and sports programming. “We wanted to throw the net out, as far as testing different genres, to figure out what’s going to work and what isn’t going to work,” Tellem said.

Entertainment industry sources say Xbox studio executives vacillate on projects — expressing strong initial interest in buying a show, then falling silent for long periods. Negotiations can drag on for months. Some blame the slow pace on Microsoft’s memo- and email-driven culture, though Tellem says she has full autonomy to green-light shows.

More than one would-be partner, initially was attracted by the game console’s audience of males aged 18 to 34, has simply abandoned discussions in frustration, they said.

Deals take time to come together, said Tellem, adding that she doesn’t see “being thoughtful and cautious as a bad thing.”

Tellem said the game console’s ability to deliver interactive storytelling will differentiate Xbox studios’ shows in a crowded entertainment space where it will vie for viewership against rivals including Netflix, Amazon, Hulu and others. She boasts of building a 200-member team in Vancouver to work alongside the Santa Monica staff to develop the tools needed to enable a deeper interaction with content.

During her tenure at CBS, Tellem earned a reputation as a digitally savvy executive, overseeing the network’s website and serving as a strategist and deal maker.

But in meetings with Hollywood executives, Tellem is said to struggle to articulate precisely what she wants when it comes to interactive narratives, opaquely asking for concepts that show off the capabilities of the Xbox. One executive described how Tellem talked in a pitch meeting about how she watches her sons play on the Xbox — a comment that, while quaint, suggests a lack of first-hand familiarity with the game console.

Tellem dismisses any suggestion that she is unfamiliar with the Xbox platform. She has talked, in the past, about how observing her sons watching an NFL game while simultaneously tweeting and checking their fantasy sports rankings, has informed her thinking about how interactivity could enhance the traditional TV experience. Tellem says she pushes the content community to consider this from the onset, whether it’s incorporating polling or bonus content or time-shifted comments.

“We’ve found, over the years, that the best shows come from the creators telling us what their vision is — as opposed to the other way around,” Tellem said.

Jordan Levin, the Xbox Entertainment Studios’ recently installed executive vice president, cited as an example of this new interactive entertainment an exhibit seemingly drawn from Web 1.0: Plans to stream the Bonnaroo music festival via Xbox Live, starting on June 13.

Subscribers to Xbox’s online service can watch the concerts as a traditional telecast, or pick their vantage point — selecting among the stages and performances. Fans can form a virtual queue to hold conversations with band members backstage, via Microsoft’s Skype.

RealNetworks delivered a similar experience in 2001, with U2’s Elevation Tour, in which its webcast offered multiple-camera views of the live concert and afforded viewers the opportunity to go backstage.

Most frustrating for prospective business partners is the lack of a settled business model to finance Microsoft’s original content initiative. It is unclear whether the programming will be available for purchase, or included as part of the Xbox Live subscription.

“We’ll be experimenting with a lot of different ways we monetize the content,” Tellem said. “That’s one of the challenges. The fun is figuring out what the business model and strategy will be. We’re doing it on a case by case basis, depending on the show.”

In deal meetings, those pitching shows say Microsoft is seeking worldwide exclusive rights to big-budget shows for years in an attempt to create the kind of blockbuster programming that will fuel Xbox Live subscriptions the way that “House of Cards” and the fourth season of “Arrested Development” did for Netflix.

This strategy leaves partners, who often assume part of the cost of production, without a way to fully recover their investment, say those involved in negotiations. Traditionally, studios that go into deficit to finance a show sell distribution rights to TV networks outside the U.S. to recoup costs.

“Anytime there is a new programming service, there has been skepticism about the ability to monetize that content in ancillary markets,” said Levin. “In almost all cases, successful content in the primary window has created value for all parties involved.”

Despite its growing pains, Xbox studios will showcase a handful of its new shows in New York including a World Cup-inspired reality series, “Every Street United,” about the global search for soccer’s most talented street players. It debuts in June — one of five programs with scheduled premiere dates.

A six-film documentary series tentatively titled “Signal to Noise” debuts sometime this year with “Atari: Game Over,” an exploration of one of the most notorious flops in video game history, the game E.T. The Extra-Terrestrial.

The sci-fi drama “Humans,” an English-language adaptation of the Swedish series “Real Humans,” explores the creepy consequences when anthropomorphic robotic servants become a must-have tech accessory for every family. Xbox will share premiere rights for the U.K. show, which begins production in May.

A second Halo digital feature, to be produced by “Prometheus” director Ridley Scott, enters production in the coming weeks — with a tentative November release date.

Other projects in development include a half-hour variety show developed by Sarah Silverman’s comedy collective, JASH; a hybrid live-action/stop-motion animation show from the creators of the Emmy Award-winning series “Robot Chicken;” and an adaptation of Warren Ellis’ bestseller “Gun Machine.”

Entertainment industry veterans say Microsoft’s development efforts have been aided by Levin’s hiring in February. He brings experience in running a television network and programming for millennials as a founding partner of digital media company Generate, as well as chief executive of the now-defunct WB Television network.

As Xbox Studios strives to make its mark in Hollywood, Tellem says the entertainment venture enjoys the backing of Microsoft’s new CEO.

“We are a challenger, we’re not incumbents in any way,” Tellem said. “I think he respects risk-taking and innovation. I’ve gotten nothing but very positive response.”

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