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But basically it went like this:
The guy who made a lot of the design for games like Wolfenstein, Doom, Quake, Hexen and Heretic, John Romero, left id Software after being burned out by the process of getting Quake out. If he hadn't left, then he would have been fired because it was perceived that his working ethic at the time wasn't too great. Quake as a game took several iterations and lots of work had to be scrapped so it isn't too unlikely story. Quake was originally supposed to be a radically different game. This is important later on.
Romero at the time was top of the top game designers and basically was able to struck the deal of the century to make his own company with Eidos which was the top of the top publisher at the time. So in late 1996 John formed Ion Storm with some guys he knew and wanted to make games with. This included Tom Hall (designer of the Commander Keen and partially Doom whom left id Software before Doom was released), Todd Porter and Jerry O'Flaherty. Later on Warren Spector (whom was famous by his work at Looking Glass which went down around the time Ion Storm was founded) also joined in.
Central philosophy behind Ion Storm was that "Design is Law" which meant that technology shouldn't get in the way of the game design. This was an issue during the development of Quake where the technology underneath the game kept changing constantly and designers weren't able to build a solid game on top of it until Quake was behind its expected schedule. Ion Storm wanted to give its main creators complete freedom to create games similar to those making films using "auteur" method. And this happened by licensing the latest ready to use technologies and then building the game on top of that. This wasn't problem free however and is important later on.
Ion Storm was split into few different groups, one working in Dallas and one working in Austin after Warren Spector joined in. One working in Dallas was the main HQ and each of the creators were making projects of their own. John Romero's Daikatana was one of them. Warren Spector's project was Deus Ex. Tom Hall worked with Anachronox. Todd Porter worked on Dominion. Jerry O'Flaherty worked on little bit of everything as a visual artist, I think.
Ion Storm's internal company politics were a big mess. I won't go into that but it greatly influenced why Daikatana ended up being like it was. It's my understanding that Todd Porter went on a spree of sabotage within the company but I don't know how true that is. Daikatana as a project was doomed for several good reasons since the start even without the internal company struggles.
For Daikatana, Quake 1 engine was licensed and Romero was calculating to ship the game in one year for December 1997 release. However they also started an interesting experiment by hiring talented people off the modding communities to work on Daikatana. These people, while talented, weren't used to working in an actual company and things went south pretty fast. John Romero was used to working with people who knew what they're supposed to do but these modders expected a person to lead a team which Romero in my humble opinion at the time wasn't entirely capable of.
Since Ion Storm was a new company and this was the late 90s, aggressive marketing was everything and when there was no game to promote, the marketing people started promoting the people in the company. Which led to Romero giving them authorisation to release an ad he apparently didn't particularly like which started "John Romero's about to make you his ♥♥♥♥♥. Suck it down." which was the first thing people ever got to know about Daikatana's existence. This was controversial enough that we still talk about it sometimes and make memes which reference to it. Romero has since then apologized for the ad in several occasions.
And this is the point where things really started to roll. Daikatana's design document as written by Romero was absolutely massive. This is because he wanted Daikatana to be something like the original Quake he had envisioned but not as radical departure from existing FPS games. Instead something slightly closer to the earth since according to him, making a radical game like that was a too big of a financial risk.
However the Daikatana's design docs made several design suggestions Quake engine wasn't entirely capable of delivering. So they needed to start making changes to the technology running underneath the game. And as if this wasn't enough, Romero as a designer was easily influenced by other games. So when new games and newer technology was being released, Romero adjusted and changed the game design. In particular the release of Half-Life in 1998 on design side and Quake 2 engine being released in late 1997. Romero counted on that existing Quake 1 engine graphics and other game assets could be used with Quake 2 engine as they were but when they got their hands on it they realised everything had to be remade from scratch. So Daikatana was delayed. There exists a playable alpha build of the Quake 1 engine powered Daikatana and it's actually pretty interesting.
This game engine switcharoo and other stuff was little bit too much for the stressed to Romero's team and they started quitting and some of them made their own company. The brains behind this was ex id Software CEO Mike Wilson whom left due to the Ion Storm's internal politics and founded Gathering of Developers which then went on to publish the Romero's ex-team's, calling themselves "Third Law Interactive", game Kiss Psycho Circus.
After that and getting Todd Porter out of the company, things started to progress smoother. But not entirely smoothly. Quake 2 engine as a tech caused trouble. Romero hired his then girlfriend Stevie Case to help with the levels. She had talent but the fact she got hired was quite controversial due to nepotism accusations and so forth. Also Romero spent a lot of time deathmatching in multiplayer games playing Doom, Quake and Quake 2 online rather than leading the team.
Then some other stuff happened but this is getting long already. Read the book Masters of Doom for more. But the point is that Daikatana got delayed several times. And when Daikatana was eventually released in 2000, several years after the supposed release date, it flopped because it had massive technical problems and even some major design issues. Around Daikatana's release, it was even rumoured that John Romero had been shot with a pistol bullet through his head. This was however yet another provocative marketing thing but it was forgotten quite fast thankfully.
At least Warren Spector got Deus Ex out and kind of that way justified the existence of Ion Storm in a big way.
I should also add that there was the E3 Daikatana demo ♥♥♥♥ up which probably was due to Todd Porter messing around. They had to have something to show for the game and had something to show for the people in time but when it was actually shown the demo ran very low FPS rate and that caused Eidos to grab controlling role in the Ion Storm which was founded to avoid such publisher control.
Knee Deep in a Dream - The Story of Daikatana[pastebin.com]
Unfortunately the original is no longer online. But I did remember the "go play Diablo" line what got me to find it on Google. The article is very interesting and contains a lot of interesting stuff that Masters of Doom doesn't mention.
Speaking of Masters of Doom, I wonder what if both Johns had remained together in a possible universe where Romero got a haircut and worked on Quake.
Romero could get funds out of the ♥♥♥♥♥♥♥ Ether, I think Carmack was wrong on keeping the team super small and with Romero bringing money from anywhere, they could had gone slightly bigger, not what Romero did with Ion Storm which was an un-managed ♥♥♥♥♥♥♥♥♥♥♥ of dozens of people but rather a focused team with actual project managers.