Here's the Really Smart Thing Microsoft Could Do With Minecraft

NEW YORK (TheStreet) -- Microsoft's (MSFT) purchase of Minecraft publisher Mojang gives it a strategic opportunity no one is talking about: getting back into the business of digital game distribution.

Microsoft could use Minecraft to challenge the clear leader in distribution: Valve's Steam. According to IHS Screen Digest, the Steam platform has a 75% market share. In 2013, DFC Intelligence estimated the size of the market at $5.5 billion.

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Valve's Steam business model is similar to Apple's (AAPL) iTunes and Google's (GOOGL) Play app stores. Valve receives a 30% revenue cut of anything sold on the Steam store.

Even though Steam was launched more than a decade ago, in 2003, it's still growing rapidly. In January, Valve co-founder Gabe Newell said the company had sales growth of 65% with 65 million accounts, but a few weeks ago Valve said user accounts had increased to 100 million.

Privately held Valve also has a great track record developing its own games. Successful franchises include Dota 2, Half-Life, Team Fortress, Left 4 Dead and Counter-Strike.

A few years ago Forbes valued Valve at $2 billion to $4 billion, but given Valve's recent user growth, large market, valuable intellectual property and Steam distribution business, one can easily come up with an estimate of the company's value at $8 billion without making aggressive assumptions.

To understand why Minecraft is important for Microsoft to compete with Valve, one must look at Steam's history.

When Valve developed Half-Life 2, it wanted to easily update the game and protect it from piracy. By offering an easy patching feature and always-on digital rights management, Steam addressed both needs.

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Because Valve required all Half-Life 2 gamers to use Steam, millions of gamers became captive to the platform. Once Steam reached critical mass, Valve offered to use the ecosystem to sell other developers' games for a 30% revenue cut.

Minecraft can be Microsoft's Half-Life 2. According to the Minecraft Web site, 16.8 million gamers have bought the game on personal computers, while a total of 54 million versions of the game have been sold across all platforms.

These aren’t ordinary buyers. They're passionate users who voraciously eat up any updates and new features.

If Microsoft built a distribution rival to Steam and leveraged Minecraft to turbo-charge its adoption, there is little doubt tens of millions of gamers would use it. Unlike Microsoft's previous failed attempt, called Games for Windows -- LIVE, a new platform would have a legitimate chance to succeed due to the size and repeat engagement of the Minecraft user base.

And if Microsoft's platform does gain significant market share from Valve's Steam, the profits from distribution wouldn't even include the value of the Minecraft game by itself. The combination would make the purchase of Mojang a home run.

Microsoft, the obvious strategy is laid out. It's your move.

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At the time of publication, the author had no positions in the companies mentioned.

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This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.


TheStreet Ratings team rates MICROSOFT CORP as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate MICROSOFT CORP (MSFT) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, solid stock price performance, reasonable valuation levels and good cash flow from operations. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

You can view the full analysis from the report here: MSFT Ratings Report

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