Microsoft – Building blocks

Microsoft is buying users and opportunity not electronic Lego.  

• Microsoft has agreed to purchase Mojang, the games developer behind Minecraft for $2.5bn.
• Minecraft is a unique video game that emphasises building and exploring rather than any particular mission or story line.
• The game is best described as electronic Lego and is available on almost every platform under the sun except Windows Phone (ironically).
• It is as open-ended as a video game can get and despite graphics that make the Wii look advanced, it has been a colossal success with over 100m registered users.
• Users can either play for free through a web browser or purchase the software to play natively on almost any platform.
• So far conversion of free players to paid players is somewhere around 15%.
• Although, Microsoft has said the acquisition will be break-even in FY15E (ending June), I think that it will quickly make access to all versions of Minecraft free for everyone.
• This is because I believe that this acquisition has everything to do with ecosystem and users and nothing to do with Lego.
• Minecraft is a world, not unlike Second Life, where users can interact with each other and this is what I suspect attracted Microsoft.
• The graphics of Second Life a far superior to Minecraft but critically, it has less than half the number of users.
•  I suspect Second Life would have cost Microsoft more and have refused to be integrated into Microsoft.
• Furthermore 86% of Minecraft’s users are below 30 years and 65% are below 21 years of age.
• One of Facebook’s biggest problems has been the loss of younger users as their parents have come onto the system which was part of the reason for the acquisition of WhatsApp.
• When I look at Microsoft’s Digital Life offering, the glaring hole that it has is in social networking which makes up 24% of all user time spent on smartphones and tablets.
• I have long been of the opinion that Microsoft could migrate XBox Live to fill this space but with the acquisition of Minecraft, I think that Minecraft will end up fulfilling that role.
• Its’ completely open ended environment could be developed to also offer a new graphical form of social networking thereby filling the last major hole in Microsoft’s Digital Life offering.
• Minecraft’s huge user base would also give this critical mass from launch and I suspect that Microsoft will do everything it can to keep the existing users happy.
• This is why I believe that Microsoft has purchased Minecraft and comparing it to the $40 per user that Facebook paid for WhatsApp, $25 per user does not look so expensive.

• This acquisition is also critical because it is first definite sign that Satya Nadella is taking Microsoft down the ecosystem route rather than the Enterprise software route.
• If he was not on board with this strategy, there is no way that he would have allowed this acquisition to go ahead.
• To me this is a positive sign as ecosystem is the only route to long-term growth and reinforces my view that Microsoft is still one of the best places to look when investing in the digital ecosystem.