Why Are Microsoft And Amazon Paying So Much For Minecraft And Twitch?

Microsoft has raised more than a few eyebrows by announcing it will spend $2.5 billion to acquire Swedish game developer Mojang, creators of the popular indie sandbox game Minecraft. It follows hot on the heels of Amazon paying $970 million last month for Twitch, the gaming video-streaming service launched in 2011 (which had also featured on Google’s wishlist of purchases).

So why the sudden rush of interest in gaming companies? And why the huge valuations?

At a simple level, the numbers speak for themselves: with reported revenues from the gaming industry now approaching $80 billion -- more than the international film and music industries combined -- both acquisitions would appear to be smart moves. Minecraft alone has sold nearly 54 million copies and has broad appeal to both casual and hardcore gamers alike across its mobile, tablet, PC and console platforms.

However, the history of casual gaming is riddled with over-valuations. Let’s not forget Zynga, creators of Farmville, who were valued at IPO at $7 billion but are currently trading at 30% of their original share price (in part because of the seemingly unstoppable rise of Candy Crush Saga, launched in November 2012).  Yet even King Digital Entertainment, the company behind Candy Crush, has faced a turbulent time -- it lost 16% of its share price before the end of the first day of trading, with shares currently valued at almost half the IPO price.

Both Zynga and King Digital Entertainment were criticised for focusing almost exclusively on one flagship game, an accusation often levelled at Mojang too. Seen in this light, it’s easy to think that Microsoft is way too late to this particular party. But there’s more to it than sales figures alone. If we draw on GlobalWebIndex’s 2014 research -- based on interviews with more than 80,000 adult internet users across 32 different countries -- it’s clear that the demographics and habits of gamers are a major factor behind Microsoft and Amazon parting with so much cash for these young companies. Essentially, it’s about the audiences that Mojang and Twitch give them access to.

Globally, 4 in 10 internet users report an interest in gaming -- more than the equivalent for playing, or even watching, sport. Interest in next-gen games consoles is also significant: according to GWI’s research, 15% are intending to buy a PlayStation 4 and 1 in 10 want to purchase an Xbox One. Significantly, these gamers have a very young age profile: one-third of online gamers are from the 16-24 age bracket, with another third ages 25-34. But perhaps the more pressing trend here for Microsoft is that so many of today’s gamers are playing on mobile devices; 35% of Internet users say that they’ve played an online game via their phone within last month, while 1 in 5 report having done the same via a tablet.

That said, future growth is far from guaranteed: mobile gaming rates are remaining steady and casual social-network based gaming is becoming less popular (having peaked in mid-2013). As a result, one of Microsoft’s intentions may be to exploit Minecraft to boost sales of its Windows Phones. With Minecraft yet to launch on this device, dedicated content may provide a sorely needed boost to a brand that is currently used by just 5% of Internet users. Similarly, Amazon’s interest in Twitch is probably connected to its plans for Amazon Prime; Twitch’s audience of hardcore gamers are twice as likely as others to have paid for a live TV or film stream.

In truth, then, Microsoft’s and Amazon’s purchases are probably less about the simple acquisition of profitable companies and much more about exposing young and lucrative audiences to their wider product portfolios.

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