Microsoft and Mojang: where’s the strategic rationale?

Microsoft finally announced today its intention to acquire Mojang, the maker of the Minecraft game, after days of rumors. Throughout the last few days, I’ve been wondering why Microsoft would want to buy Mojang, and now that the news is official, and we have commentary from Microsoft, I’m none the wiser. This is a somewhat baffling acquisition, unless it’s been made purely as a financial investment, and there are much better uses for that money in building Microsoft’s business and ecosystem.

One-hit wonders abound, but Minecraft is different

There are lots of one-hit wonders in the mobile gaming market in particular — King, Zynga, Supercell and others have had one huge hit and have thereafter struggled mightily to repeat the success of that one game with subsequent releases. Mojang is also a one-hit wonder, but Minecraft is very different from FarmVille, Clash of Clans or Candy Crush Saga, in several ways:

• It’s not just a mobile game, though it’s one of the highest-grossing in that category. It’s also available on PCs and consoles
• It’s not a flash in the pan like some of those other games — Minecraft appears to have real longevity, having launched in 2009 and showing little sign of slowing down yet
• It has a totally different monetization model from those other games, booking essentially all its revenue from a customer up front with a high-ticket one-off purchase, rather than in-app purchases or advertising
• Its customer base likely skews significantly younger than most popular mobile games (and perhaps games in general), in that it is very popular among kids of all ages as well as adults
• Minecraft is to a far greater extent than other games an ecosystem rather than just a game, with hundreds of books and digital material helping players to learn how to use it effectively.

So, this acquisition isn’t the same as buying one of those big mobile game makers — Microsoft clearly isn’t buying into a one-hit wonder and hoping to replicate its success. And it’s a good thing, too, since the founders are all moving on with the acquisition. But what is Microsoft after?

Bringing content in-house has rarely worked out well

There’s a long history of platform owners bringing certain content in-house, for a variety of reasons:

• Generating exclusivity around the content for the owned platform, which is in fact what Microsoft did with the Halo franchise. That’s clearly not the intention here, however.
• Bringing content to an owned platform the current owner won’t bring it to. For example, bringing Minecraft to Windows Phone. However, this is an enormously expensive way to achieve that objective, and Microsoft could easily have covered the costs of porting and maintaining Minecraft on Windows Phone for far less.
• Wanting to capture more of the revenue opportunity associated with popular content, rather than splitting or even handing over all the revenue to the content owner.

None of these really make a great deal of sense in the context of the Mojang acquisition, except possibly the last one. But that’s hardly a strategic rationale — rather, a simple financial transaction. Perhaps Microsoft heard that Minecraft might be for sale, and didn’t want it to end up in the hands of major competitors who might withhold it from the PC or Xbox platforms. But that seems a little far-fetched, and none of the other reasons really make a lot of sense.

Possible growth opportunities around Minecraft

Minecraft remains popular, and it’s entirely possible that it will remain so for some time to come. But its growth rate won’t be enormous, and its revenue and profit potential is marginal in the grand scheme of things for Microsoft, at least based on the current trajectory. What could Microsoft have in mind that wasn’t on Minecraft’s current roadmap?

Licensing seems one of the most obvious things, with the huge Minecraft ecosystem Mojang has already built, between merchandise, film rights, books and other content. With a film coming out in the next couple of years, licensing and merchandising fees might grow considerably, and that’ll be a nice additional revenue stream, but it still makes this primarily a financial rather than a strategic deal.

There are things Microsoft needs more

As Microsoft aims to move into the next phase of its history, and focus primarily on services which run well on third-party platforms, and to a lesser-extent first-party devices, there are plenty of other strategic priorities which would be better served by a $2.5 billion investment. What Microsoft needs to do above all else is:

1. Create more compelling cross-platform services, which are good enough that potential customers can justify spending significant amounts of money on them. Microsoft’s current consumer services are all either free or are competing against players whose versions of them are free. That’s not the basis for a growing and profitable revenue stream from services, and Microsoft badly needs to fix that. Acquiring one successful game with a decent but modest revenue stream isn’t the answer, and Minecraft doesn’t feel like the foundation for building more of the same. It’s a one-off at worst, and a franchise at best, but it’s not the core of a new set of monetizable services for Microsoft beyond what’s there now.
2. Solve the fundamental shortcomings of Microsoft’s first-party devices (beyond Xbox). Xbox and gaming is ironically the one area where Microsoft’s first-party devices are on par with the competition — it’s the other Microsoft first-party devices, and Microsoft’s other platforms which need real help in this department. The absence of major apps, and the long lag between the launch of these apps on iOS and Android versus Windows Phone is one of three key barriers to Windows Phone’s growth, and Microsoft desperately needs to fix that problem. $2.5 billion could have gone an awfully long way to closing that gap if spent wisely (not least bringing Minecraft to Windows Phone).

Given all this, I’m still struggling to see the strategic rationale — as opposed to a purely financial rationale — for the deal. It doesn’t seem to fit neatly within Microsoft’s overall strategy, and it appears to be opportunistic at best. I’m hoping we’ll learn more about what Microsoft has planned for Mojang when the acquisition closes (its press release suggests that will be the case) and that it will make more sense then.