Acquisition of Minecraft by Microsoft - Coursework Example

Strategic analysis and planning: Microsoft acquires Minecraft BY YOU YOUR SCHOOL INFO HERE HERE Microsoft acquires Minecraft Introduction Microsoft, maintaining a net income of $22.07 billion in 2014 on the heels of revenues of over $86 billion in the same year (Microsoft 2014), determined it could improve its revenue procurement and strategic position through the acquisition of Mojang so as to maintain ownership of the firm’s most popular game, Minecraft. Minecraft is a video game software program developed by the company Mojang and released in 2009. Since its launch, Minecraft managed to achieve sales volumes of 12 million copies for utilisation on PCs, the Xbox 360 gaming system and on mobile devices, making it one of the most widely popular games of all time (Campbell 2014). With such widespread popularity, it would appear that Microsoft made a lucrative and rational decision to acquire Minecraft in order to secure a more profitable strategic position in the international gaming market. However, the acquisition of Minecraft was an all-cash agreement that cost Microsoft $2.5 billion, which is a substantial financial risk in terms of expenditures for the acquisition in an environment where Mojang, Minecraft’s original developing company, only earned $326 million in revenues in 2013 (Stuart and Hern 2014). With the assumption that Minecraft manages the same revenue-producing capabilities year-on-year, it would theoretically take Microsoft 6.1 years to recover the just the cost of the acquisition of Mojang. This report conducts a strategic analysis of this acquisition in order to determine whether this was a shrewd business decision and whether the $2.5 billion acquisition can effectively serve the strategic objectives of Microsoft. 2. Evaluating levels of strategy – The Five Forces model It should be recognised that there is not a specific strategic business unit at Microsoft that is being evaluated as in 2013 the firm restructured the organisation in an effort to consolidate global business operations. The firm desired to unify the company and believed that this reorganization and consolidation would contribute to greater control and innovation production as a result of incorporating established SBUs (Ludwig 2013). Hence, strategic analysis will consider Microsoft as a newly-combined firm that now has inter-dependencies controlled centrally in areas of production, development, marketing and strategy. Michael Porter (1987) introduced his Five Forces model which describes the potential competitive forces that pose risk to a competing business, a framework for projecting future competitive activity and potential for profitability over an extended period of time. Figure 1 illustrates Porter’s model. Figure 1: Five Forces Model Source: Modified from Porter, M.E. (1980). Competitive strategy. Free Press. One of the most fundamental threats to Microsoft, when considering Porter’s model, is the bargaining power of suppliers. Microsoft is heavily reliant on its most profitable product, the Windows operating system, which is utilised on millions of PCs worldwide. For Microsoft, suppliers are substantially powerful as there are significant costs to Microsoft to switch suppliers (ICAI 2013) in a rather oligopolistic market consisting of such manufacturers as Dell, Hewlett Packard, Sony and a handful of other PC manufacturers. If Microsoft desires to sell its popular Microsoft Windows operating systems, and be the relevant operating system vendor, the PC manufacturers can dictate price increases for using Microsoft products on their personal computers. Microsoft’s acquisition of Mojang assisted in diversifying the company’s product portfolio in order to provide the firm with increased revenue opportunities (long-term) which would assist in mitigating some of the threats to high supplier power. As the switching costs for Microsoft to find new PC manufacturers to utilise its Windows operating systems are substantially high (it would erode considerable profit to do so), additional Minecraft-related revenues could offset price increases dictated by the PC manufacturers that use Windows. As Windows is already a very expensive software products, it might be necessary for Microsoft to raise prices (a negative situation for the price-sensitive buyer) in the event that suppliers begin dictating increased pricing for allowing Windows to support suppliers’ personal computing hardware. Through Minecraft’s acquisition, now Microsoft is somewhat insulated from high supplier power with the ability to increase its leverage with more stable cash flows as a result of this acquisition (Amit and Livnat 2006). Microsoft is also able to insulate itself from new, future entrants entering the consumer gaming market through the acquisition of Minecraft. The $2.5 billion acquisition agreement provided Microsoft with intellectual property rights to the software, making Minecraft the personal property of Microsoft. What makes Minecraft unique is that the game is equipped to allow purchasers to develop their own user-generated content which can be placed within the gaming software program as a means of customising their game play (Senior 2012). Any potent software development company that would desire to compete with Microsoft’s Minecraft would have to develop costly and innovative programs that allow for similar user-generated content to be included in a similar competing game. Microsoft insulates itself from this risk by owning all intellectual property rights and patents which prevent other development firms from entering the market. Microsoft’s vast cash availability and access to Mojang talents now incorporated into the firm significantly reduce the risk that new entrants will be able to provide comparable games as a consequence of substantial economic advantages and legal intellectual property protections. The third and final aspect of Porter’s Five Forces model that directly impact Microsoft is the intensity of rivalry within the personal gaming markets. There are many development firms that provide games for consumers available on gaming systems, PCs and mobile devices. However, Minecraft already has very wide popularity and an established brand both domestically and internationally. Mojang achieved such high sales volumes by using low-cost, yet effective social media marketing to build brand popularity. Research uncovered that one-third of all buyer segments learned about Minecraft via Internet social media platforms (Tong 2011). Musical artists such as Lady Gaga and Deadmau5 have featured the game in their music videos, it has been advantageous in product placement in popular television shows such as South Park, and Warner Brothers is working on developing a feature film based on the game’s premises (Kroll 2014). What this provides is significant brand recognition which is absolutely critical for a product to achieve long-term equity for the product as it serves as the foundation for effective marketing promotion (Keller 2012). Microsoft maintains an advantage over the plethora of personal gaming software programs available in this market due to the profitable brand management strategies that were undertaken by Mojang prior to acquisition. This insulates Microsoft both from new entrants attempting to replicate the success of Minecraft and reduces the marketing achievements of other gaming software manufacturers that are both expensive and difficult to construct effectively. Substantial brand recognition for Minecraft gives Microsoft significant competitive advantages. In this industry, there are few competing games with the same complexities and benefits of Minecraft to the consumer, therefore buyer power is relatively low and of little concern to Microsoft. However, consumers do have many available options with varying pricing structures which makes the switching costs for defecting to other brands moderately low. Microsoft will likely have to conduct market research if sales decline of Minecraft and reconsider pricing structures and software distribution methodologies if it is determined that buyers are gaining market power for bargaining. Only time will dictate whether this is a legitimate threat to Microsoft. Threat of substitutes is largely irrelevant for Microsoft. 3. Evaluation of key stakeholders There are several stakeholder groups that have influence in affecting the acquisition situation and also with active interest to the scenario. The following table analyses the relevancy of these stakeholders: Table 1: Stakeholder analysis The Stakeholder Relevancy Employees of Microsoft The success of this acquisition ensures career position stability and economic security as employees of the organisation. Managers receive bonuses and other incentives when sales figures meet established objectives that have an effect on families of these employees as well. Customers Customers that are loyal to the Minecraft brand want enhanced quality and features. Hence, revenue success for Microsoft represents a more enjoyable gaming experience and opportunities to engage, long-term, with the product to enhance lifestyle and recreation. Government Actors The U.S. government gains important revenues when a domestic company finds domestic sales success. The U.S. would want to encourage the company to focus on domestic customer segments as a means of fostering greater GDP and economic growth. Financial Community Companies that have offered credit to Microsoft will have a vested interest in whether Minecraft improves the profitability of the firm, hence ensuring proper payment of loans and other credit-related debt. Investors Stockholders of the Microsoft Company are highly interested in whether the firm is able to improve its asset position. Stock values are associated with the financial position of the firm which, in turn, dictates shareholder profitability in relation to stock holdings and corporate bonds. Competitors Microsoft’s dominant position as a cash and asset leader makes it possible for the firm to create innovative and creative content for Minecraft. Smaller competition does not have access to these substantial capital resources. Hence, this stakeholder group would desire Microsoft to fail in this venture which would open market entry opportunities and future profitability with their own competitive products. Suppliers Success of Microsoft as a holistic organisation provides opportunities for future contract negotiations for a variety of raw materials and PCs using Windows software. Minecraft’s success would have a trickle down effect on suppliers’ own long-term profitability opportunities. 4. External analysis – The PEST framework Internet usage and consumerism in developing countries has been advantageous to Microsoft historically as the company now has presence throughout the entire world. In many emerging markets, the government is becoming an instrumental force in privatising businesses and establishing deregulation policies to promote more foreign direct investment. Hence, from a political perspective, Minecraft maintains significant opportunities for market entry to ensure higher sales volumes in these regions where infrastructure, economy and consumer job opportunities are expanding which provides buyers with more disposable income levels in the emerging nations. Hence, it would appear that the international political environment is conducive to new market entry for Minecraft throughout the world in developing countries where telecommunications systems, retail distribution and countries adopting the capitalistic economy ideology are being supported by many developing nation governments. Therefore, the political environment throughout the world is largely conducive to Microsoft being able to expand revenue production in these countries where regulatory reforms are occurring. The international economic environment, additionally, reflects the logic of the Mojang acquisition. Microsoft maintains $77.1 billion of its total cash assets outside of the United States. This allowed Microsoft to fund the entire $2.5 billion acquisition through overseas channels that allowed the firm to avoid significant taxations as the firm would have been subject to material repatriation taxation structures if the acquisition had occurred within the US (Bass 2014). Many countries across the world and their taxation structures as compared to the United States pose revenue advantages to Microsoft when sales occur outside of the firm’s home country. Hence, the foreign acquisition of Minecraft provides many tax-aversion benefits to the firm which justifies the strategic rationale to make Minecraft a foreign product purchase. The social environment around the world is also conducive to justifying the decision to acquire Mojang. It is estimated that 40 percent of the entire global population regularly have Internet access and use it regularly (Internet Live Stats 2014). Concurrently, over 95 percent of the world’s entire population have mobile phone subscriptions (Mobi Forge 2014). Also, in 2013, there were 1.5 billion active users of social media and it is estimated that this will increase to 2.44 billion by 2018 (Statista 2014). With mobile phones, Internet and social media so prevalent and growing throughout the world, Microsoft appears to have made a rational decision for acquiring Minecraft as the game is available on multiple platforms and the most significant marketing advantage is the firm’s presence and word-of-mouth on social media around the globe. With global consumers using these new media platforms to enhance their social environments and lifestyles, Minecraft has tremendous volumes of opportunities to expand its brand visibility and also gain more purchases from consumers that have convenient access to Minecraft without necessarily having to purchase expensive gaming systems and PCs to support the program. Furthermore, the global technological environment is also very advantageous for Microsoft. In many developing nations and developed countries, there is substantial talent in software development in many international businesses. This represents opportunities to pursue joint ventures to gain access to these talents to enhance Minecraft. Furthermore, with many telecommunications companies emerging in developing nations, new distribution channels are opening for Minecraft which could potentially provide Microsoft with continued growth and ease of access to important target consumer audiences. 5. Industry analysis Microsoft maintains considerable competitive risks with its most significant rival in gaming system technologies, Sony. Sony’s new Playstation has been providing Sony with a 65 percent increase in total business revenues and a whopping increase of 290 percent in operating revenues (Parfitt 2014). Success and high levels of consumer demand for Sony’s gaming system provides consumers with a vast variety of unique games different from Microsoft’s gaming software which lowers the switching costs for consumer segments. For the Minecraft version available on Microsoft’s Xbox system, it faces substantial industry competition from a major rival with ample financial capital and talent to develop similar games, at competitive pricing structures, that could potentially erode sales success for Minecraft for the gaming console platform. There are also small- and medium-sized organisations throughout the entire world that are developing free gaming software available for download (paid for with ad revenues) and other global competitors are providing mobile gaming software at affordable prices. For the entire gaming market, it is estimated that it provides opportunities with 11 percent growth over the next four years (holistically when considering all gaming technologies and platforms). Figure 2 illustrates this growth, per segment, of this industry. Figure 2: Growth trends in gaming industry – all platforms (in million Euros) Source: DigiWorld. (2014). World video game market :eight key trends to watch in 2014. [online] Available at: http://gamesummit.pro/world-video-game-market-eight-key-trends-to-watch-in-2014/ (accessed 6 November 2014). Hence, Microsoft is likely going to be facing competition from up-and-coming and established gaming software competitors attempting to innovate new and creative gaming content for global distribution on multiple platforms. Though Minecraft has established considerable brand equity and a high level of recognition and consumer loyalty (in some segments), Microsoft must be considerate of potential new market entrants as well as conducting competitor analyses to be cognizant of the strategies and gaming contents being provided to consumers over the next four years as Microsoft attempts to recapture the $2.5 billion for the acquisition through increased Minecraft sales. It is also becoming more expensive to produce gaming technologies as a result of rising supply chain costs, payroll costs to expert talents needed to design and develop these games, and volatility in many capital markets across the world that impact capital growth for many publicly-traded technology firms. This poses a significant advantage for an established, respected and high-demand game software such as Minecraft. Microsoft will incur much less development costs and administrative costs in altering or innovating the current version of Minecraft than that of competitors that must start from scratch to create competing software packages in this market. 6. Conclusion Microsoft’s newly-consolidated organisation appears to maintain significant opportunities to find success in the acquisition of Mojang. The company’s high cash availability and new access to Mojang human capital talents provide the business with opportunities to innovate the Minecraft game and make it more relevant and in demand with multiple customer segments throughout the entire world. Capital assets and knowledge are some of the most fundamental benefits which justify the acquisition as a viable and logical strategy. The firm also has ample marketing-based advantages, with established brand equity and consumer loyalty with multiple segments that has been historically and currently achieved through low-cost Internet-based marketing and word-of-mouth. Other companies that attempt to launch a competing software program will have to start from scratch establishing a brand identity, improving product visibility and gaining consumer interest and attachment. For many, this is a highly-expensive activity and Microsoft maintains many cost advantages as a result of buying a gaming company with significant following and reputation. It is likely that competitors would have substantial expenditure problems to build a powerful brand like Minecraft and do not have the talent resources needed to do this quickly enough to cause immediate competitive problems for Microsoft. Furthermore, with intellectual property protections, an environment where distribution is supported sufficiently to many global markets, and with high industry growth rates for gaming software consumption, the acquisition has not only enhanced the current strategic positioning of Microsoft, but its future opportunities for revenue growth and prevention of new market entrants. If Microsoft utilises effective marketing strategy, the firm can achieve greater market penetration and increase demand for Minecraft which will likely outperform the sales revenue achievements of Mojang prior to its acquisition. Microsoft is a leader in the technology sector and now has the resources by which to effectively diversify its product portfolio that will ultimately lead to future opportunities for further diversification. It was, based on all evidence and statistics, a very prudent and shrewd decision for long-term strategic positioning to make the acquisition of Minecraft. In an environment where the most profitable product for the firm, Microsoft Windows, maintains little bargaining power in the market, now Microsoft has more control over its revenue production and cost expenditures needed to effectively diversify that it did not maintain prior to the acquisition. References Amit, R. and Livnat, J. (2006). Diversification strategies, business cycles and economic performance, Strategic Management Journal, 9(2), pp.99-110. Bass, D. (2014). Microsoft looks to boost Xbox bid to buy Minecraft, The Independent. [online] Available at: http://www.independent.ie/business/technology/microsoft-looks-to-boost-xbox-with-bid-to-buy-minecraft-30584821.html (accessed 9 October 2014). Campbell, E. (2014). Minecraft sales surpass 15 million copies on PC, IGN. [online] Available at: http://www.ign.com/articles/2014/04/29/minecraft-sales-surpass-15-million-copies-on-pc (accessed 8 November 2014). DigiWorld. (2014). World video game market :eight key trends to watch in 2014. [online] Available at: http://gamesummit.pro/world-video-game-market-eight-key-trends-to-watch-in-2014/ (accessed 6 November 2014). ICAI. (2013). Business strategy and strategic cost management, The Institute of Cost Accountants of India. [online] Available at: http://icmai.in/upload/Students/Practice_Test_Paper_Final/Set1/Paper15.pdf (accessed 8 November 2014). Internet Live Stats. (2014). Internet users by country (2014). [online] Available at: http://www.internetlivestats.com/internet-users-by-country/ (accessed 10 November 2014). Keller, K.L. (2012). Strategic brand management: building, measuring and managing, 4th edn. Prentice Hall. Kroll, J. (2014). Warner Bros. taps Shawn Levy for ‘Minecraft’ movie, Variety Magazine. [online] Available at: http://variety.com/2014/film/news/warner-bros-taps-shawn-levy-for-minecraft-movie-1201332000/ (accessed 7 November 2014). Ludwig, S. (2013). Massive Microsoft reorg unifies the company: ‘one strategy, one Microsoft’, Venture Beat. [online] Available at: http://venturebeat.com/2013/07/11/microsoft-reorg/ (accessed 7 November 2014). Microsoft. (2014). Q4 Earnings Release Fiscal Year 2014. [online] Available at: http://www.microsoft.com/investor/EarningsAndFinancials/Earnings/PressReleaseAndWebcast/FY14/Q4/default.aspx (accessed 8 November 2014). Mobi Forge. (2014). Global mobile statistics 2014 Part A: mobile subscribers, handset market share, mobile operators. [online] Available at: http://mobiforge.com/research-analysis/global-mobile-statistics-2014-part-a-mobile-subscribers-handset-market-share-mobile-operators (accessed 7 November 2014). Parfitt, B. (2014). Playstation revenues up 65 percent following PS4 launch, Sony confirms Vaio sell-off, The Market for Computer and Video Games. [online] Available at: http://www.mcvuk.com/news/read/playstation-revenues-up-65-following-ps4-launch-confirms-vaio-sell-off/0127760 (accessed 8 November 2014). Porter, M. E. (1987), From competitive advantage to corporate strategy, Harvard Business Review, 65(3), pp. 43-59. Senior, T. (2012). Minecraft mod API to be developed by new team at Mojang, PC Gamer. [online] Available at: http://www.pcgamer.com/minecraft-mod-api-to-be-developed-by-new-team-at-mojang/ (accessed 9 November 2014). Statista. (2014). Number of social network users worldwide from 2010 to 2018 (in billions). [online] Available at: http://www.statista.com/statistics/278414/number-of-worldwide-social-network-users/ (accessed 8 November 2014). Stuart, K. and Hern, A. (2014). Microsoft sold: Microsoft buys Mojang for $2.5 billion, The Guardian. [online] Available at: http://www.theguardian.com/technology/2014/sep/15/microsoft-buys-minecraft-creator-mojang-for-25bn (accessed 9 November 2014). Tong, S. (2011). Mining data from Minecraft, GameSpot. [online] Available at: http://www.gamespot.com/articles/mining-data-from-minecraft/1100-6331569/ (accessed 7 October 2014). Read More