Microsoft's Good (and Potentially Great) Minecraft Acquisition

It’s difficult to overstate what a big deal Minecraft is. It’s the third best-selling game of all time behind Tetris and Wii Sports, and unlike the latter especially, it is a remarkably sticky experience: the vast majority of customers (over 90 percent on PC, according to Microsoft) sign in every single month. Were Microsoft to change nothing they claim their $2.5 billion purchase of Minecraft maker Mojang would pay for itself in less than five years.1

Minecraft, though, has the potential to make a lot more money; currently, Mojang only makes money off of players once: when they buy the game. All of those additional hours of play are essentially free. Contrast this to a game like the legendary World of Warcraft, which has made somewhere between $10 and $20 billion over its lifetime through a combination of up-front purchases and subscription fees2 and you realize that Minecraft founder Notch may be gaining his sanity at the cost of a lot of potential earnings.3

Minecraft, though, isn’t just a great financial decision; it’s a good strategic one as well that fits very nicely with Microsoft’s new vision as outlined by Satya Nadella:

At our core, Microsoft is the productivity and platform company for the mobile-first and cloud-first world. We will reinvent productivity to empower every person and every organization on the planet to do more and achieve more.

At first glance, this statement seems to reference products like Office and Azure, but it also works very well for Minecraft. Minecraft is more than just a game: it’s a community, with a huge cloud component, developers, and, at its very essence, it’s about making things. What could be more productive than that?4

Moreover, like Office and Azure, Minecraft is truly cross-platform. It’s the best-selling paid-download game on both iOS and Android, and it also has a very popular PS3 version and a newly-released PS4 version, with a PS Vita port on the way. Xbox head Phil Spencer took care to note that this would remain the case:

Minecraft adds diversity to our game portfolio and helps us reach new gamers across multiple platforms. Gaming is the top activity across devices and we see great potential to continue to grow the Minecraft community and nurture the franchise. That is why we plan to continue to make Minecraft available across platforms – including iOS, Android and PlayStation, in addition to Xbox and PC.

Here’s the thing, though: how much better would this acquisition look if Microsoft didn’t own Xbox at all?

  • Microsoft would not need to reassure skittish gamers that the game would remain cross-platform (To be clear, making Minecraft an exclusive would be financially stupid. Sure, Microsoft made the first Xbox a success by buying Bungie and making Halo an exclusive, but that was for a tenth of the cost)
  • Microsoft would have a lot more latitude to capture more value from Minecraft, increasing the value of this purchase. Certainly any effort to make gamers pay more will be resisted, but when said efforts can be couched in “Microsoft is trying to help the Xbox” language it makes it that much more difficult to win the inevitable PR battle
  • Most importantly, Microsoft’s incentives would be much more aligned with the Minecraft community’s: their goal would be the success of Minecraft, full stop, without the complication of needing their own platform to succeed

As long-time readers of this blog know, I’m a big believer in the power of incentives, and in the case of Microsoft, it’s the foundational reason why I believe the company would be better off split in two. I wrote in It’s Time to Split Up Microsoft:

In 2000, Windows, Office, and Server were a virtuous cycle. Today, Windows and the entire devices business is nothing but a tax. Microsoft is a company that is meant to serve the entire market, and the way to do that is through services on every device. It’s all fine and well to say that you will treat devices equally, but given Microsoft’s history – and the power of culture – I just don’t believe it’s possible.

I would create two companies: the devices side, which includes Windows, Windows Phone, and Xbox, and let them do the best they can to grow that 14%. Heck, make Kevin Turner the CEO. Windows profits will keep the company going for quite a while, and who knows, maybe they’ll nail what is next.

The other company, the interesting company, is the services side – the productivity side, to use Nadella’s descriptor. This company would be built around Office, Azure, and Microsoft’s consumer web services including Bing, Skype and OneDrive. These products don’t need Windows; they need permission to be the best regardless of device.

Every word here applies to Minecraft, a truly remarkable phenomenon that is not only about gamers but very much about the next generation of builders – including developers. I think it has the potential to continue to grow and, along the way, not only make Microsoft a whole bunch of money, but also enable an entire ecosystem. It really could be the Office of gaming. The danger is that, like Office did for too many years, it withers unnecessarily because Microsoft has Windows consoles to sell.5

  1. According to their press release, “Microsoft expects the acquisition to be break-even in FY15 on a GAAP basis”; on a GAAP basis is referring to the annual amortization cost. Microsoft won’t make back the entire $2.5 billion in FY15 []
  2. For reference, all developers combined have made just over $20 billion on the App Store []
  3. I don’t blame Notch though; I really appreciated his resignation letter and am happy for him []
  4. It’s also a community that needs Microsoft’s help: while Mojango offers Minecraft server software, another popular option is ensconced in a licensing battle that is probably best addressed by Minecraft itself building a superior option. Microsoft can do that []
  5. The same thing applies to Microsoft Studios broadly; what a waste of resources to make Halo: Spartan Assault for touch devices only to limit it to Windows 8 and Windows Phone. Imagine how much revenue Microsoft has foregone by not developing for iPad and Android, and that’s before we even get to the potential of Halo proper and the other Microsoft Studios titles on Playstation. There’s a lot of latent revenue potential here, although Minecraft would be the crown jewel []