Microsoft

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Anyone who thought Microsoft’s days of enormous, risky acquisitions were over now that ex-CEO Steve Ballmer had left the company will have to think again.

The first major acquisition under new CEO Satya Nadella is Mojang, a small Swedish independent video game studio and the maker of massive hit Minecraft.

The indie game has become a cultural sensation—a game that’s sold over 54 million units across multiple platforms, and one that kids in just about every household in America and across the developed world are familiar with, if not actively playing.

“Gaming is a top activity spanning devices, from PCs and consoles to tablets and mobile, with billions of hours spent each year,” Nadella said in a statement. “Minecraft is more than a great game franchise – it is an open world platform, driven by a vibrant community we care deeply about, and rich with new opportunities for that community and for Microsoft.”

“‘Minecraft’ is one of the most popular franchises of all time,” added Xbox chief Phil Spencer. “We are going to maintain ‘Minecraft’ and its community in all the ways people love today, with a commitment to nurture and grow it long into the future.”

Meanwhile, Mojang’s founders will leave the business following the acquisition.

“The ‘Minecraft’ players have taken the game and turned it into something that surpassed all of our expectations. The acquisition by Microsoft brings a new chapter to the incredible story of ‘Minecraft,’” said Mojang CEO Carl Manneh in a statement. “As the founders move on to start new projects, we believe the high level of creativity from the community will continue the game’s success far into the future.”

Risky Business

Microsoft has made large acquisitions in the past.

Under Ballmer, the tech giant acquired Finnish phone maker Nokia for over $7 billion. But Ballmer’s vision of a “devices and services” company runs in contrast to Nadella’s vision of a “productivity and platform” company.

To Nadella, Xbox and video games are not a part of Microsoft’s “core” though it’s “not far from the core” according to the CEO.

So it’s strange, to say the least, for a video game studio to be the first major acquisition under Nadella.

$2.5 billion is a lot of money, even for a major tech firm like Microsoft.

Mojang is a small studio, with just a handful of games. Minecraft is the cash cow for the developer, which raked in $330 million in revenue in 2013, $129 million of which was profit. That’s revenue from game sales and, increasingly, from merchandise and licensing.

$129 million in profits isn’t bad at all—especially for a small, independent studio that employees around 40 people.

But if Microsoft manages to simply double those profits somehow it would still take ten years for the company to break even on the Mojang purchase. If profits flatline at around $130 million per year it will take two decades to just break even.

Which leads to some pretty important questions, no doubt many of which Microsoft considered before signing the deal.

First off, can Microsoft use its marketing power and global reach to increase the profitability of Minecraft? The game is already a mega-hit, after all. Can Microsoft get it into even more hands somehow? Or can they make the merchandising and licensing more lucrative?

Second, will Minecraft continue to be a cultural phenomenon well into the future? Its target demographic—kids—change tastes all the time. What’s popular with kids one year is dead and gone the next. Maybe Minecraft will have the staying power of Mario (though Nintendo isn’t in great shape these days) and LEGO and various other iconic toys and games, but it’s also possible that some other viral hit game will usurp Minecraft’s place in the collective hearts of gamer kids.

Predicting the future is hard. Predicting ten years into the future of games and tech is pretty much impossible.

Hearts and Minds

Microsoft may be purchasing Minecraft not simply to make money—it’s not like video games have made the company very much money to begin with—but to establish a cultural foothold in young consumers.

Microsoft has traditionally made video games that appeal to older gamers. Games with “M” ratings like Halo and Gears of War. Sony has done a bit more to appeal to young gamers with titles like Little Big Planet. And recently Activision and Disney have both made major strides at cornering the young gamer market with Sklyanders and Disney Infinity respectively.

But Nintendo has long been the long-time king of kids games. Microsoft’s purchase of the most popular modern kid game could be viewed as a direct shot at Nintendo, and a shot taken while Nintendo is already struggling thanks to lackluster Wii U sales and mobile taking a bite out of the handheld console market.

I’m not certain Microsoft needs to corner the kids market, but it’s an interesting theory and quite possibly a reasonable business strategy for the company.

Even so, it’s hard to see how this ties into Nadella’s “productivity and platforms” strategy.

What this means for the game itself.

A lot of people are worried that Minecraft itself will suffer moving from a fairly open and gamer-friendly indie studio to a behemoth like Microsoft.

Mojang disagrees.

“Change is scary, and this is a big change for all of us. It’s going to be good though. Everything is going to be OK” the company said in a blog post announcing the acquisition.

“Minecraft will continue to evolve, just like it has since the start of development. We don’t know specific plans for Minecraft’s future yet, but we do know that everyone involved wants the community to grow and become even more amazing than it’s ever been. Stopping players making cool stuff is not in anyone’s interests.”

Again, the future is impossible to predict. I’ve read gamers concerned that micro-transactions and in-game advertising are the next step for Microsoft, and I don’t blame anyone for their concern.

But it’s also possible that Microsoft understands why the game is so popular and so successful, and will be reluctant to try to fix what isn’t broken.

Microsoft could very well do their best to stay true to the spirit and ethos of Minecraft…and still the game may change in ways that current players and fans won’t accept.

Perhaps a more important question for gamers is this: What sort of new video game IPs could Microsoft have spent that cash on instead? How many new games, or even new studios, could Xbox have enlisted or created to create new and compelling content for PC and Xbox One?

Unlike the Facebook purchase of Oculus, which flooded the fledgling VR company with cash, Minecraft is already a well-established IP and Mojang hardly needed a cash influx to stay afloat or produce a product.

So two-and-a-half-billion dollars were just spent to acquire something with no foreseeable consumer benefit in what is at best a dubious business plan and a major gamble.

It may all pay off beautifully in the end, of course. Microsoft could snag an important and growing demographic; gamers could see a new and improved Minecraft; and investors could see a handsome return on the deal.

Some analysts see it in this light.

“Acquiring the Minecraft game through the Mojang acquisition gives Mr. Nadella & Co. the right product at the right time as the company continues to invest in its Xbox strategy and begins its foray into the intensely competitive mobile-phone space with Nokia now under Microsoft’s hood and the restructuring plan under way,” wrote FBR analyst Daniel Ives in a note.

But no matter how you look at it, Microsoft is taking a big risk spending so much on a single game, no matter how popular. Even the most expensive video game budgets pale in comparison.

Minecraft has sold 54 million copies. Can Microsoft sell another 54 million? Another 100 million? Because it will need to do this and more to earn back its $2.5 billion investment.

SOURCE: FORBES.COM

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