Why MS buying Minecraft for 2.5B makes perfect sense.

http://kotaku.com/why-microsoft-spent-2-5-billion-on-the-makers-of-minec-1634807464

Why Microsoft Spent $2.5 Billion On The Makers Of Minecraft

When we first heard rumblings that Microsoft was looking to buy Minecraft studio Mojang for a swimming pool full of hundred-dollar-bills, the amount of cash sounded absurd to just about everyone.

$2.5 billion! Not only is that an astronomical number, the type you'd expect to come signed on a giant novelty check, it seems like way too much for a one-hit developer like Mojang. For the past week, tons of people have been scratching their heads. Why would Microsoft spend $2.5 billion on a game that has already sold over 50 million copies? Everyone already owns it. Those sales have already happened. What's the point?

Even crazier, as Mojang noted in their blog post about the deal this morning, founders Markus "Notch" Persson, Carl Manneh, and Jakob Porsér are all leaving. With all that money, Microsoft isn't even snagging the man who dreamed up Minecraft in the first place, which makes it clear that this is a gamble for the property, not the talent behind it.

In a few years, we could look back at this deal as yet another massive Microsoft flub, to be remembered alongside Xbox DRM and mandatory Kinect. (This one might be harder to reverse.) But there are a few logical reasons for this acquisition. In many ways, it makes sense. Let's break it down.

Minecraft is still Minecraft

Call of Duty and Grand Theft Auto might be big games, but Minecraft is a global phenomenon. Minecraft is one of the most spectated games on the planet, a widespread tool for education, and now possibly Microsoft's most popular and beloved application since Word. Ask any kid what his or her favorite video game is, and the answer's probably going to be Minecraft. Ask for their favorite YouTuber, and the answer's probably going to be "someone who plays Minecraft." It's impossible to overstate the global impact of this game.

And yes, those 50-million sales have already come and gone, but Minecraft remains on top of the iOS charts every single week, and Microsoft can now make money not just off Minecraft's sales but through merchandise, licensing, and other forms of media. (Maybe a Minecraft movie?) We'll likely see expansion packs, sequels, and even more Minecraft skins that players gobble up every month. Maybe Microsoft will start an official marketplace for buying and selling Minecraft maps. Maybe they'll release Minecraft 2 sooner than anyone could've possibly expected.

To put it simply: Microsoft just bought digital LEGO. Anything The LEGO Group has done, Microsoft can now do too.

In their press release about the sale, Microsoft said they expect to break even on this acquisition by the end of this fiscal year. That's June 2015. In other words, they expect to make back $2.5 billion, and they expect it to happen soon. Based on Minecraft's global impact, that's not out of the question.

Pieces Of The Pay-To-Win Pie

For a long time, some Minecraft players have been making significant amounts of money by running servers that charge people for items and other features. The player-vs.-player server KoonKraft, for example, sells in-game weapons for up to $475. Another large Minecraft network, Hypixel, charges up to $150 for VIP passes that give players access to their extra features.

Earlier this year, a small controversy erupted in the Minecraft community when Mojang representatives spoke up about how players technically aren't allowed to charge for gameplay features, even on heavily-modded servers. The controversy fizzled, however, when Mojang showed no signs that they would actually enforce the rule and go after those big servers.1

You'd better believe that's going to change.

With Microsoft in charge, it's hard to picture Minecraft remaining the wild west it is today. To speculate a little bit… I imagine that any server that charges money—whether it's for cool items, aesthetic upgrades, or even just basic access—will inevitably have to pay a healthy chunk to the giant corporation that now runs things. So-called "pay-to-win" servers could become pay-Microsoft-to-win. It seems likely that Microsoft will either take control of these servers entirely, replace them, or charge very hefty fees for the privilege of running them.

If Microsoft does stick their hands in the Minecraft server pie, it's hard to predict how regular fans will be affected. On one hand, Microsoft's intervention could stop some of the shadier servers from inflating their own economies and manipulating players into spending hundreds of dollars just to get ahead of one another. On the other hand, Microsoft could wind up facilitating and encouraging even more of these pay-to-win servers in a gamer-unfriendly way.

In fairness, Microsoft has done a pretty good job with Minecraft on Xbox 360 so far, having worked with the studio 4J on what might be the definitive version of the game. There's a ton of skin DLC, yes, but so far Microsoft has yet to nickel-and-dime Minecraft players in the way some other publishers might have, which helps alleviate some concerns.

All Hail Microsoft's Ecosystem

You probably don't own a Windows Phone. Most people don't. As Reuters reported on Friday, the Windows Phone only has something like 2.5% of the global smartphone market. Microsoft wants that to change. Putting Minecraft on their phones is a solid first step.

And what about other hardware? Though Mojang has promised that sales and development for Minecraft on other platforms (iOS, Android, PlayStation, Mac) will continue, there's an interesting little nugget in their blog post on the issue (emphasis mine):

There's no reason for the development, sales, and support of the PC/Mac, Xbox 360, Xbox One, PS3, PS4, Vita, iOS, and Android versions of Minecraft to stop. Of course, Microsoft can't make decisions for other companies or predict the choices that they might make in the future.

Huh. So, hypothetically, if Microsoft decided to charge Sony inordinate amounts of money in exchange for regular updates of Minecraft on PlayStation systems, what would happen if Sony turned them down? What if Sony decides that it's just not worth it to keep Minecraft on their systems when they now have to send giant checks to their biggest competitor?

And what about the future? Will we really see possible Minecraft expansions or sequelson PlayStation platforms? Will Microsoft really not use Minecraft as a weapon in their battle to keep the Xbox One competitive with the PlayStation 4? How much longer is Microsoft going to help support their biggest competitor?

What if Microsoft starts offering discounts or other benefits to players who buy the game on Xbox or Windows platforms? We all know Microsoft loves buying exclusives—well now they've got one of the biggest exclusives on the planet. It seems out of the question for Microsoft to keep any future editions of Minecraft off iOS and Android, where the game has sold tens of millions of copies, but PlayStation might be a different story.

With this deal, Microsoft has all the leverage when it comes to all things Minecraft. The price tag was hefty, but for them, the results could be well worth it.

2.5 billion was a bargain MS...Minecraft is nothing but successful. they'll recoup the money spent a lot sooner than some here seem to realize. MS purchased a phenomenon for 2.5 billion...not just "one game for 2.5 million".

At the end of the day it's a big gamble that Microsoft has the resources to risk.

Minecraft could stop being cool any second, another game could come out and do the minecraft formula better before Microsoft can beat them to the Minecraft 2 punch. Minecraft is little more than a name, a lucrative name I'll admit but nobody plays minecraft because it's minecraft.

It doesn't take much to unhinge the swarm clinging to it right now.

No one knows more about making software where you have to dig around for hours to find something useful than Microsoft. Just look at Windows 8!

Lol

I heard , team members are leaving Mojang after M$ buyout . Only thing I can think of is "From the creators of Minecraft" during trailer of some new game .

There are two perspectives:

The Gamers

The Business men (Suits)

---

This is a piece that would make business men intrigued, but not gamers. To a gamer, a massive $2.5 Billion just went towards securing a one hit wonder studio and their IP that already made Xbox games, albeit it multiplatform games. That's at least 10 AAA retail real exclusive 1st party games that could have been created (with a 250 million dollar budgets each). Imagine that? 10 new games for gamers to play. Instead, like the NFL deal, Steven Spielberg deal, the timed exclusive Rise of Tomb Raider deal, the Nancy Tellum Xbox TV studios (folding), and now with the Minecraft deal we gamers are aware huge sums of money (Billions) was spent to secure an already popular Xbox game for the purpose of selling Windows phones and future Xbox's? Now we have to read corporate apologist perspectives on it too?

Add in the fact, team members of Mojang are leaving after this payday including founders Markus "Notch" Persson, Carl Manneh, and Jakob Porsér. The potential for a RARE situation (or the 1st party studio track record) is something for game fans and Minecraft fans to consider, if not worry about, as Mojang team members go retire on beach front properties. I'm sure we'll see more departures as time goes on.

As a gamer I see nothing to cheer-lead. If this was the WallStreet forum, I would understand the cheer-leading especially M$ investors and M$ leaders, but last I checked we're at Gamespot.

Also, lol-taku.

To add to that thought, the article writer and presumably Microsoft seem to be banking on expansion or sequel sales, but minecraft is pretty much already doing everything interesting you can do with the formula thanks to modding. With the creative team gone, they're gambling not just on the game itself staying relevant, but also on any fresh devs they have to bring in to somehow keep the franchise going.

Yeah so you put $2.5 billion into something, you get $26 million out of it and that's a profit. This is nonsense. What... are they then going to resell Minecraft for $2.5 billion to Sony? I think not.
Like I said, MS has bought Pachter.

Apparently something went completely over your head too because that does not explain in any way how spending 2.5 billion and getting 26 million out of it is a profit, or how that makes perfect sense. So the people in accounting 'generally accept' idiocy. Big surprise. I guess they expect their to be some kind of non-monetary value to all this?
They can give me a $1000 and I will give them $900 back. That is WAY more than a bank would give them. But they wouldn't do that. They just wrote an article saying 'why it makes perfect sense' without explaining why it makes perfect sense.

Well apparently it's too difficult for you to explain so. Don't know what you're trying to build up to. If I say something doesn't make sense and apparently it does make sense, that probably means I didn't get it.
This is what I read: They spend $2.5 billion and they'll get maybe, I dunno, $500 million out of it. Now because it's an investment it could be used to fudge numbers and look better than they are. Maybe that's generally accepted and I don't know what that would get them unless they are looking to be bought or something, but generally speaking I'd say that losing money to 'appear' more valuable is not a good idea? I find it difficult to understand how just having that money isn't more valuable unless by buying it for $2.5 billion the value of Minecraft is now suddenly accepted to be $2.5 billion even though it is clearly not? They lose way more than $500 million to gain that $500 million on paper.

Either way I'd expect that spending that money on something with a bigger return would be better. Saying that there was nothing they knew to throw $2.5 billion into that would have made them at least get it all back eventually sounds really, really bad to me. If the best they can do is get say 20% out of an investment that sounds absolutely horrible to me.
I really don't get how this is a good deal and that article did not help me in any way understand why it is a good deal. Probably because I have never been interested in economics and there is some accounting trick that I just don't know about.

2.5B ... Imagine how many AAA caliber exclusives that is ... Minecraft is minecraft ... Almost everyone played it by now. I dont get what they thinking but we will see. If they manage to sell expansions or anything alike to those 50M owners it might get profitable at some point.

They need first to make 2.5B because that how much it cosed and from there it gets profitable... Wii it ? We will see

I'd like to see Mojang release another title, maybe some of the games Mojang had put on the back shelf however long ago....maybe that would be something Microsoft could help with.

The $2.5 billion is gone though. You can't leave that out of the equation. It's gone. They paid maybe $1.5 billion dollars, if they ever manage to sell it for $1 billion again when it doesn't sell anymore, to get a higher interest rate. How can that be a good thing. That's the part right there that I don't understand. Does that mean they had nothing better to invest in? To me that sounds horrible.

It sounds like 'appearing' to have made a profit (while in reality you lose a ton of money to make it appear that way), is for some f'd up reason much more valuable than having the actual money to begin with.

BTW I really want to understand it, I am not trying to talk you to death but if you don't wanna explain the whole economy to me I can understand, then I'd like someone else to. I can't stand not understanding something.

At the end of the day, at least 50% of the shareholders in Microsoft agreed to this purchase. This isn't just the call of some top executive alone; this is the decision of tens of thousands of investors in one of the largest companies in the world. I think that their accumulated knowledge of commercial affairs is vastly greater than Gamespot and all its users'.

Very smart move on their part. That river of merchandise will flow for a long time. Not to mention the game itself. I thought this was a pretty genius buying decision.

Ok so I think I get it all now. And thank you for taking your time to explain.

MS thinks: "Money not doing anything is not worth a whole lot. If we can get that money to generate more income than the interest rate that's a plus."
I say: "But you're sinking a lot of money into Minecraft and that money is gone. It doesn't add up like that."
Pachter says: "They have so much money doing nothing, that the $2.5 billion isn't even noticeable. They have enough money in reserve. They need money generating more money. More money means more than the interest rate it is getting them now."
I say: "I don't think that Minecraft is going to generate you more than the $2.5 billion you put into it, EVER. Even if you sell it all to someone else when you feel like it. So I think it's a useless deal. You can't just look at the interest rate without looking at how much you invested, and you can't say the value of a company is as high as the investment you made. It may work like that for accountants, but it doesn't work that way in reality. Its value is the money it will make you. Saying they only need to make over $25 million a year for this to be a good deal, when they poured $2.5 billion into it, is false"

So I guess we'll see how it will pan out.

The easier way to understand this is if we compare the changes in net worth (cash + all assets) and changes in cash. Here's what it may look like. The first column represents the net worth of $2.5 billion if it buys Mojang, and the second column represents its net worth not buying Mojang. The second table represents cash instead. Figures are of course arbitrary, and are for making the example only. We are also assuming that bank gives 25m interest per year, while Mojang makes 100m profit per year. Finally, we assume that at the start of year 4, Microsoft sells Mojang for $2.5 billion to someone else (in reality, that can be higher or lower depending on how they do; in reality, they will usually just keep the company as long as it keeps on making more profit than alternative investments).

At the end of the day, as long as 1) the value of Mojang doesn't drop over time & 2) Mojang makes more profit than alternative investments, then Microsoft is only going to end up richer eventually. Further, more than 50% of Microsoft investors do believe that those two conditions will come true, and so they went ahead with the acquisition.

ADD: For reference, Mojang made 92m profit in 2012 and 139m profit in 2013. As you can see, it's already making a few times more profit than just banking the 2.5b (which isn't hard), but more than that both the company and the profit is growing. While I don't know exactly what other alternative investments are available to Microsoft, I'd wager that Mojang's profitability is highly attractive, and even if it's not the strongest now by comparison, it has the potential to become even more profitable in coming years.

I think the idea that this is to simply return the invest is wrong. I just don't see MC returning it with that kind of amount, but it's not new.

Consoles have historically been sold at losses to gain market share. I believe the same principle applies here. Check this out, from the GAF:

Code: (PC sales

+------------+------+ | sales | days | +------------+------+
| 1m to 2m | 102 | 
| 2m to 3m | 162 | 
| 3m to 4m | 93 | 
| 4m to 5m | 140 | 
| 5m to 6m | 61 | 
| 6m to 7m | 80 | 
| 7m to 8m | 91 | 
| 8m to 9m | 71 | 
| 9m to 10m | 73 | 
| 10m to 11m | 80 | 
| 11m to 12m | 71 | 
| 12m to 13m | 101 | 
| 13m to 14m | 50 | 
| 14m to 15m | 87 | 
| 15m to 16m | 70 | 
+------------+------+ 
While not a continous line, the time it requires to sell a new copy on PC is decreasing. I can imagine the same pattern applies to consoles and mobile. I'm extremely surprised by this myself. It's easy to say MCs popularity is dying, and it may be so. However, MS has enough money from it's shareholders to be able to take a hit. After all, that's what coh is for. It must be invested somewhere. I can see them make atleast 500M with merchandize, movei rights, spinn off games, part of sale son every platform, including Playstation, and the now talked about MC2. On th other hand, if Minecraft does grow in popularity to become somethign like Mario or Pokemon, or maybe even the virtual LEGOs, it can be a huge advantage to MS products and services.  Will it boost phone/tablet/xbox/windows/etc sales by itself? Nah. But aligned with other aquisitions and features, it can definitelly be very helpfull 

Hes not saying that, hes saying that MS will make more Money Buying Majong for 2.5 billion than if said 2.5 billion was left in the bank.

Essentially what he is saying is that Investing the 2.5 billion will gett them more Bank than if they just left the money sitting around gaining interest.

He said nothing about 'profit' and the article had nothing to do with Profits.

Return on your investment=/=Profit.

This is rather accurate.

I followed your link to standard accounting practices. Which has nothing to do with your current conversation. But since you want to bring accounting into it......spending $2.5 billion for a return of $25 million is a loss. Interest of $25 million would be a gain. The analogy is terrible.

Reading that makes me want to play Minecraft now. On my Xbox One. In my Master Chief skin.

Thank you Phil.

Milking kids with texture packs won't make this a break even purchase in a year.

Selling the Xbox brand as a whole will, though.

Book it.

Eh, maybe, maybe not.

Investors are investors, there's a strong possibility they don't know dick about games or gaming markets. They just see minecraft sells a shitload and makes tons of profit, therefore it's worth buying. I highly doubt most people with stock in the company factor in things like the key devs at mojang leaving, or that it's already been out for ages on almost all platforms, or that there isn't much room to expand the concept into expansion or sequels.

For better or worse, gamespot users are mostly gaming enthusiasts. We enjoy games, we enjoy talking about games, we enjoy reading about games. On our end of things, we can see the additional concerns with this buy others wouldn't notice.

Then again, maybe that's giving way too much credit to system wars posters.

Justify it how thye want. unless they make Minecraft 2 ... on a fantastic engine.... and unlike Mojang/Notch populate it with content ...... the wtf is the REAL point?

But then we will lose mode support probably so it ends up being crap in the long run.

This has done nobody favaours... 2.5 BILLLION is not a fun size check. they will never earn that back from Minecraft... its desperatly trying to grab certain markets... and its sad.

You shouldn't use computers if you can't find useful things in Windows 8 within seconds (Hint: Windows + S)...

Minecraft does money because it is in multiple platforms and sell good an all,There is also a return investment here to look,cutting any of the platforms that have it on windows and xbox will cut MS money gains from it and will take even longer to get the investment back.

Minecraft 2 xbox one exclusive. That would rock the world of minecraft....oh yeah and the MMO spin off world of minecraft is also xbox one exclusive.

Lems complain about indies.. Microsoft pays 2.5 billion for an indie dev lol

Best thing to come out of this are more Kaz Hirai tweets.

that account is pretty funny, lol. whoever runs it has an amazing sense of humor.

wait a minute...O_o

....-_-

I honestly don't see it.

MineCraft is a fluke, but a great fluke, it caught on, but that's all it's done, caught on, everyone has it, it isn't a type of game that a sequel good become great, like how World Of WarCraft is the same game with huge expansions, because they know that if they make a second it just won't be as big of a success, I'm baffled on what this means and the creator himself has left so the vision of what mind craft is, has gone, MineCraft is simple and yet complex, but it doesn't sell due to graphics and so what can come after Minecraft really. I honestly just don't see an ordinary game coming from them and selling off of the name of the creators of minecraft. I think it may pay off for them and everything but for me as a gamer, 2.5bn could of been spent on more productive area's of gaming like making a true first party developement Team and bringing new high end first party games which are unique to Xbox or PC

For a lot of them, or at least their portfolio managers, it's their job to know everything that can affect the returns of the deal. You can bet that they definitely took into consideration all those factors you just mentioned, and many other factors System Warriors are not even familiar with. Further, you can also bet that they have quantified the effects of those considerations from mere concepts into information useful for comparison between investments.

You gave too much credit to gaming enthusiasts, and too little credit to people who invest/manage investments for a living.

Thought this piece with Spencer was interesting. Basically no matter what platform, and Spencer mentions PlayStation, they are going to support it.

https://www.youtube.com/watch?v=lXNWchwDiG8

I did. It was BS. As far as accounting is concerned...it's a way to account for profit and loss. Period. That article didn't understand accounting at all. Second.....in regard to business investments....they should generate profit. Profit is money coming in over going out. And while they might make more money on the product....and that is an assumption not a fact....they still lost the initial investment. Money sitting in a bank is NOT lost. It's generating income for you. Buying something and expecting minimal return is not good business. The only thing loss is good for is as a write off if everything else is making money. Not every division MS has is profitable. This makes zero sense. You can spin that stupid article all you want but it boils down to making $25 million over holding $2.5 billion with roughly another $25 million in interest added at the end of the year. Which one means you have more money?

As far as GAAP.....that is not the correct use of the term.

best part: That's at least 10 AAA retail real exclusive 1st party games that could have been created (with a 250 million dollar budgets each).

More useless artificial exclusives that bring absolutely nothing to the table. M$ are so irrelevant to the progression of this industry I will always says that things would better if they weren't around. In fact, they are like a cancer to gaming.

It's a shame really.

a lot of whining and crying going on in this thread, lol. lets get this straight, MS buying a blockbuster game/studio is bad to you and not worthy of a system wars thread? even though it's gaming news through and through? so now ur going to spend the whole thread moaning about them not spending the money on what you want specifically? kinda petty dude lol.

MS has plenty of money to spend on other games. there's no reason why they can't add some good assets at the same time as well. so give it a rest with all this phantom trolling ur doing Mr. Bold Print, please. because ur long winded and boring. MS has more exclusive games out/coming out, this year and next, than Sony. that's not even counting all their timed exclusive stuff. so you moaning about them adding a stellar asset to their portfolio as a cherry on top doesnt even make sense. ur just trying to drum up support for a problem that isnt there.

All this fanboy cheer-leading for buying a one hit wonder Xbox multiplat, Mojang founders departing, the comparison's to RARE, quoting loltaku, and weak 1st party situation...it's a shame really.

I'm not sure where you went to study to think GAAP cover what a company invests in. But hey....you have $100. The bank will pay you $2 interest for a year. Instead of doing that I will give you $5 today. At the end of the year when you have $5 and I have the principal ($100) and interest ($2) we'll compare and see who has more.

nailed it, yet lems here will defend it.