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After taking over as Chief Executive Officer earlier this year, Microsoft ("MSFT")CEO Satya Nadella has made a splash this week by making his first major acquisition since taking over leadership of the company. The company reportedly purchased Mojang, the developer of the video game hit Minecraft.
After turning down previous approaches from Electronic Arts and Microsoft, Mr Persson has surprised the gaming world by starting fresh discussions to sell his Swedish company, Mojang, to the computer giant for an estimated $2bn (£1.2bn).
Reaction to this news has been mixed, with Microsoft's stock rising a bit right as news of the purchase became public, but quickly settled and is trading down about -0.69% Friday. It appears that many are not making much of this deal, while others fear that Microsoft's culture may be incompatible with that of Mojang, whose well known developer Markus "Notch" Persson, has a history of being outspoken and slightly anti-establishment. Of course, under prior CEO Steve Ballmer, Microsoft had been known to make some costly acquisitions that were later sold at a loss or absorbed into the company without unlocking significant new value. But I believe judgment should be held with Nadella until after we have precedent to judge him by.
What are Microsoft's plans for Minecraft?
Microsoft believes it can boost sales of Minecraft - and of Xbox - by creating new editions of the game and setting up a film and merchandising franchise. However, Mr Persson's willingness to sell has troubled Minecraft's loyal audience.
Who knows if the new Microsoft can pull this off effectively, but let's not pretend that the real possibility exist to make this $2 billion purchase an incredible deal for the company. According to research conducted, it has been discovered that the popularity of this game has spread, not by typical word of mouth or positive reviews, but via YouTube videos demonstrating how to build admittedly incredible block creations such as famous buildings, statues, and cities. The videos are showing the demographic that the video game isn't so much a "game" as a sandbox for creative play.
Minecraft is one of the most popular games in the United States with over 100 million registered users. It's not as flashy as typical video games-the graphics are lo-fi and 8-bit. At first glance, the game play seems incredibly simple: In creative mode, the goal is to build structures in an open 3D environment.
In this way, Minecraft is different than other video games because the object is to construct, not to tear down. It's a video game, but it can also be classified as a building toy.
So while Microsoft is looking towards merchandising opportunities and movies/TV shows to build this growing brand, it has a unique opportunity here to transform Minecraft into a digital LEGO brand, a juggernaut in the toy world that recently surpassed Mattel as the most valuable toy company in the world, at $14.87 billion.
This is where brand management of Minecraft must come into focus for Microsoft. The allure of Minecraft (in much the same way as LEGO) is not so much in the brand itself, but what the brand enables fans to do. With LEGO, the company leverages an incredible number of franchises with vast followings and produces sets that allow fans of these franchises to interact and imagine themselves within that universe. It's this type of immersement that creates value for LEGO and keeps fans buying more.
Currently the Xbox division is undervalued within Microsoft's larger company. And Nadella has stated that there is no plan to spin off the division into a separate company. And this makes sense with Microsoft's goal to be essential in the living room. But estimating a valuation with Nintendo multiples, some suggest that Xbox could be worth $17 billion. But under the Microsoft umbrella, many consider Xbox to be worth less than half that amount.
So in order for Microsoft to unlock value from Mojang, I believe that not only should they develop merchandising and movie plans but also provide opportunities for cobranding with other franchises such as Disney (NYSEIS), Marvel, and Pixar brands, Halo, Lord of the Rings, and DC Comics.
Allowing fantasy immersion is the key to Minecraft's future growth and is the only way Microsoft will expand their living room strategy they are using Xbox to target. Just as the LEGO Movie was a 90 minute ad for buying LEGO Star Wars kits, films and merchandise must continue to leverage the fantasy immersion so they can grow out their living room, mobile, and social strategies. Said another way, creating merchandise and movies, while creating revenue, will not leverage Microsoft's greater goal of increasing Microsoft cloud and productivity services in the living room UNLESS it is a means to get Minecraft fans to keep wanting to play Xbox, buy Windows Phones, and use their online services.
But I've been so far impressed with Nadella's actions leading Microsoft, and while unlocking LEGO-like value out of the Mojang name may be difficult, I think the $2 billion buy was a steal (especially considering the money they spent on the Swedish company would have needed to be repatriated at significant cost, if brought back to the US).
I think we're just beginning to see a resurgence of Microsoft that, while not a dominant player, can still provide tremendous value to shareholders who are patient.