Wednesday, March 31, 2021

This article was first featured in Yahoo Finance Tech, a weekly newsletter highlighting our original content on the industry. Get it sent directly to your inbox every Wednesday by 4 p.m. ET. Subscribe

Buying Discord could make Microsoft the gaming behemoth it's always wanted to be

Microsoft (MSFT) is considering dropping a cool $10 billion on video game chat app Discord, according to recent reports. If the software giant does take the plunge, it could help Microsoft’s Xbox brand finally overtake arch nemesis Sony in its decades-long fight for gaming supremacy.

With Discord, Microsoft would instantly access insights about the kinds of games people play, not just on its own platform, but on Sony’s (SNE) and Nintendo’s (NTDOY) as well as on mobile devices. That knowledge could help Microsoft develop games that appeal to more people — something it’s been laser-focused on for years. After all, exclusive games that appeal to the masses will lure more players to Xbox over Sony’s console.

What’s more, as a fast-growing social network, Discord would provide Microsoft with a service whose monthly active users doubled in the last year to 140 million. That would go a long way in soothing any hard feelings the company still has after losing its chance to buy TikTok, the social network featuring viral short-form videos.

Microsoft is dead set on taking down Sony

Need proof that Microsoft is serious about taking down Sony? Look no further than its recent $7.5 billion acquisition of ZeniMax and the company's catalogue of blockbuster games including “The Elder Scrolls,” “Fallout,” and “Doom” franchises.

Microsoft has been trying for years to unseat Sony as the king of first-party games, going so far as to snap up 23 different game studios — easily outpacing Sony’s 16 studios.

To be sure, Xbox’s “Halo,” “Gears of War,” and “Forza” franchises have offered plenty of top-notch action. But Sony has countered with “The Last of Us II,” “Ghost of Tsushima,” “Spider-Man: Miles Morales,” and “Horizon: Zero Dawn,” all massive releases for Sony’s PlayStation line.

Microsoft has also built brand loyalty from customers with incredible deals on its subscription services like Game Pass, which gives users unlimited access to more than 100 games for $9.99 per month. It has admittedly made missteps, like its decision to increase prices on Xbox Live Gold subscriptions, then, after an outcry from gamers, immediately reverse course. But even canceling that price hike shows how much Microsoft wants to win over consumers.

So where does Discord fit in? According to Martin Yang, senior analyst of emerging technologies and services at Oppenheimer, Microsoft could use the information about the kinds of games Discord users play the most to inform the development of titles and features at Microsoft’s first-party studios.

The biggest benefit of Discord is that it allows players on different consoles to chat while playing the same game. Cross-platform gaming, or playing online with a friend who uses a PlayStation, while you use your Xbox, is a relatively new development in gaming. But it’s quickly become a must-have feature for major third-party titles like “Call of Duty” and “Fortnite.”

“In those cross-platform games, Discord, I would say is 90% of the time, the common denominator is the optimal chat solution,” Yang explained. “So this is a very high value for all players across different platforms. And this is really the neutral ground for multiplayer gaming.”

By continuing to offer Discord as a neutral service, Microsoft could engender more good will from gamers while also getting its name in front of PlayStation and Nintendo players.

Discord is a fast-growing social network

Outside of a means to develop first-party games — titles created by console makers’ in-house studios — Discord would provide Microsoft with a hot consumer-facing social network that appeals to younger people. That’s something it doesn’t already have, if you don’t count Microsoft’s LinkedIn, which is more for work than play.

Microsoft has already tried and failed to scoop up a youth-friendly social network. Last year, the tech giant attempted to acquire TikTok’s U.S. operations as part of the Trump administration’s push to force China’s ByteDance to divest itself of that arm of its business. But TikTok rejected Microsoft and opted to move forward with Oracle (ORCL), though that deal fell through when Trump left office.

Microsoft stood to gain a good deal from TikTok by getting its name in front of millions of consumers who may not necessarily use Microsoft products. And while a large number of Discord’s current users likely use Microsoft’s Xbox or play on Windows-based PCs, Discord is quickly expanding beyond just games.

In June, the company changed its motto to “Your Place to Talk” to emphasize its broad appeal. In his 2020 wrap-up post, Discord CEO Jason Citron called out the ways people are now using the app outside of gaming including virtual weddings, social and political organizing, and college clubs.

With a chance to get in on a still relatively small social network, Microsoft could reinvigorate its consumer recognition for customers who don’t typically use its products — especially those on Apple’s iPhone (AAPL) and Google’s Android (GOOG, GOOGL).

There, of course, is the risk that Microsoft could see the entire $10 billion enterprise turn out to be a dud, like its acquisition of a video game streaming service similar to Amazon’s (AMZN) Twitch, called Beam.

Beam — renamed Mixer — never touched Twitch’s numbers of viewers or streamers, and Microsoft shuttered it in June. Beam’s webpage now redirects to Facebook’s gaming service.

But Discord is a different beast from Mixer; namely, it doesn’t face the kind of competition that Beam had in Twitch. Even with the Discord acquisition, though, Microsoft will still need to keep pushing out new titles if it wants to overtake Sony — which has several hotly anticipated games on the horizon.

At the same time, Microsoft will need to ensure it doesn’t alienate Discord’s users by changing the service too much. If Microsoft can hold onto those loyal users, and create the kinds of games they’ll keep chatting about, then a $10 billion splurge on Discord could be money well spent.

By Daniel Howley, tech editor. Follow him at @DanielHowley