Many on Wall Street thought Microsoft ought to exit the game business, but since taking over as CEO, Satya Nadella has taken the opposite tack. Here's why.
"Microsoft is trying to do too much, and these assets add no clear value to the overall business," Nomura's Rick Sherlund said at the time. He sounded a view that was popular in some financial circles that gaming was at best a sideshow, at worst a distraction. Microsoft would serve shareholders far better by focusing on its bread-and-butter enterprise business, many reasoned.
But Microsoft had other ideas.
"Gaming is a top activity spanning devices, from PCs and consoles to tablets and mobile, with billions of hours spent each year," CEO Satya Nadella said in a statement on Monday after the company confirmed its $2.5 billion purchase of Mojang AB, the Swedish makers of Minecraft.
"Minecraft is more than a great game franchise -- it is an open world platform, driven by a vibrant community we care deeply about," Nadella said.
Nadella's PR handlers must have had to arm-wrestle their boss not to add his now-signature "mobile-first, cloud-first" mantra into the press release, but the line wouldn't have been out of place with the worldview he has repeatedly articulated since his appointment as chief executive last February.
Nadella also sees what he describes as the "digital life category" as strategically important to Microsoft. In his -- July letter to employees, he talked at length about the technology benefits "flowing from our gaming efforts into our productivity efforts -- core graphics and NUI in Windows, speech recognition in Skype, camera technology in Kinect for Windows, Azure cloud enhancements for GPU simulation and many more." At the time, it was all about Xbox. Now Microsoft is adding a much-coveted property that ranks asthe third best-selling game of all time behind Tetris and Wii Sports -- for the price of a veritable rounding era. Microsoft, which ended the June quarter with some $86 billion of cash on the balance sheet, also gets a Trojan Horse that it will presumably use to introduce younger people to more Microsoft products other than Xbox.
Until now, Minecraft has not been available on Windows Phone. That's obviously going to change as Microsoft seeks to become a more important player in the mobile game business, both for smartphones and tablets. No doubt, Microsoft's keen on getting more people to use its mobile hardware products. And if Minecraft introduces enough users to the panoply of higher-margin software products that Microsoft sells, such as Office 365, then Nadella will have the last word in the argument. For the record, Microsoft expects the acquisition to be break-even sometime in its fiscal 2015 year.
Could Microsoft still screw this up? Sure. And the departure of co-founders Markus "Notch" Persson, Carl Manneh, and Jakob PorsÈr once the deal closes means it's going to be up to Xbox boss Microsoft's Phil Spencer to manage the transition successfully. For now, he's saying all the right things about supporting the Minecraft franchise across platforms -- including iOS, Android and PlayStation, in addition to Xbox and PC. (Minecraft is available on Xbox One.)
But Microsoft is getting the Minecraft franchise and little more. In a note commenting on the deal, Cowen and Company's Gregg Moskowitz wrote that there's no sign that other potential hits are in Mojang's product pipeline. In other words, Microsoft appears to be buying the game and 40 developers, but effectively nothing else.