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. Continue reading
After weeks of reporting that Google would acquire game-streaming site Twitch to bolster its YouTube empire, it appears those talks have fallen through and Amazon will now acquire the site. The YouTube logic was so obvious that it didn’t even require explaining, but Amazon’s acquisition is a bit more of a head-scratcher. I thought I’d look at the context for Amazon’s acquisition to see why they might be doing this, and what it might mean. This analysis builds in part on several previous posts on Amazon, which you can see here. The first part of this post focuses on the context, which may be useful if you haven’t looked at Amazon’s media business in depth. If you just want to skip straight to the analysis of where Twitch might fit in, you can click here.
Media is the slowest-growing part of Amazon’s business
First, the obvious stuff. Amazon divides its business into three product segments for reporting purposes: Media, Electronics and other general merchandise, and Other. Other comprises mostly Amazon Web Services (AWS), advertising revenue and Amazon-branded credit cards, while Media includes both physical and digital media including books, music and video. The Electronics and other general merchandise category is basically the catchall for all other e-commerce revenue. When you look at year-on-year growth rates for these three segments, Media is clearly the slowest-growing of the bunch:
That’s not altogether surprising. Essentially all of Amazon’s business rests on the transfer of spending from legacy categories to categories it competes in, whether that’s e-commerce replacing bricks-and-mortar retail or digital content replacing physical content (or even cloud computing replacing premise-based computing). As such, Amazon’s addressable market is directly tied to three factors:
- the size of the legacy markets it’s seeking to disrupt
- the degree to which those markets are shifting into categories Amazon competes in
- the market share Amazon is able to capture.
If we look at these three factors for Amazon in the Media category, the picture isn’t that great:
- The overall size of the various Media markets (principally books, video and music) is small in comparison to the overall retail market (books is about $15 billion a year in the US, video is about $18 billion between sales and rentals, and music is about $7 billion per year, for a total of $40 billion, compared with total retail sales in the US of a trillion dollars per quarter, and e-commerce sales alone of $300 billion per year)
- The switch to digital and online sales is well underway, with 41% of video revenues in the US in the last four quarters going through digital channels, for example
- Amazon’s share in categories other than books is relatively low.
In addition, Media is the one category where Amazon enjoys a very significant share of the legacy as well as the new category, since it’s one of the biggest sellers of CDs, DVDs and physical books. As such, the ceiling is low, the transformation is well underway, and Amazon has such a large stake in the legacy business that even a rapid transition from physical to digital formats doesn’t benefit Amazon greatly (and may actually hurt it in categories where its digital share is lower than its physical share, including music and video). Continue reading
King Digital, maker of Candy Crush, reported its earnings for Q2 2014 on Tuesday, and they weren’t pretty. The market acted as if its results had suddenly soured from one quarter to another, but the reality is that most of the underlying trends have been worsening for about a year now, since well before its March IPO. See the charts below.
As a primer, two things to know about King and its financials. One is that Candy Crush, easily its most popular game, dominates its results. The other is that its main business model is in-app purchases, and that this model works on the basis that a small percentage of its users make them, but those that do make them spend enormous amounts of money on them. So bear those two facts in mind as you proceed.
First, gross average bookings per user, which King reports on a daily basis. You can see that these peaked a year ago, in Q2 2013, and have been falling since:
So why is this number falling? Well, almost every component which goes to make up that number is in decline or at least slowing down. First, overall user numbers, which King measures three different ways (daily active users, monthly active users, and monthly unique users, all in millions): Continue reading