Why Microsoft is clawing at social media

  • Microsoft is reportedly in talks to buy Discord social media platform for $ 10 billion
  • The purchase would complement its Xbox service – but expose it to regulatory interference

Microsoft (USA: MSFT) is one of the most attractive names in American technology. His office software is ubiquitous, his reputation is virtually impeccable and he cleared his antitrust hurdles in the early 2000s. So why is it trying to delve into the uglier, volatile world of social media – especially while the industry is under scrutiny from regulators?

Last year alone, Microsoft discussed the purchase of TikTok, the video app from Chinese technology giant ByteDance. Pinterest (US: PIN), the digital mood board platform, and now apparently Discord.

The attempts at TikTok and Pinterest turned out to be unsuccessful. But the third time might be the appeal. The Wall Street Journal reported last week that the tech giant is in exclusive, advanced talks to buy over $ 10 billion worth of Discord messaging platform – and could be finalized by the end of April if negotiations don’t fail.

Dis-what?

Readers may scratch their heads at this massive price. But the platform is very popular with gamers and teenagers with more than 100 million active users per month. It grew to more than half the size of in just six years Twitter(US: TWT) Average Monetizable Daily Active User Base. No wonder it attracts the attention of the takeover.

The service offers voice, video and text chat functions, as well as the option to play live stream games AmazonThe competitive service (US: AMZN), Twitch. The rise of Discord also happily coincided with the growth of “esports,” the increasingly profitable pursuit of participation in international video game tournaments.

However, Discord is free at the place of use and without advertising. Instead, it makes money from its ‘Nitro’ subscription service, which allows members to pay $ 10 a month for custom tags, upload larger files, and stream at higher video quality.

This ‘freemium’ model is proving to be a hit. According to the Wall Street Journal, the platform’s valuation doubled to $ 7 billion after a funding round in December last year. It has still reportedly failed to turn a profit – but like some young tech companies, growth is the name of the game. And Discord wins.

In fact, there have been some signs that the company is considering an IPO – including hiring its first chief financial officer, Tomasz Marcinkowski, in early March.

Suitable for Microsoft

“Much of the technology has been tending towards consumption,” said Microsoft CEO Satya Nadella in 2016. “This technology has a place in our lives, but I think the next 10 years will be technology that enables profound creations. “

That prediction was spot on. Technology firms that focus on user-generated content have grown staggeringly. Take TikTok and Pinterest – both have vibrant communities that are largely responsible for the high quality content that is displayed on their platforms. Roblox (US: RBLX), the digital space where users create their own video games, started last year. Daily Active Users (DAUs) rose 85 percent to 32.6 million in 2020.

Discord’s similar combination of social media and gaming has resulted in an equally active and engaged user base. And Microsoft has already proven it’s serious about getting much bigger in video games after one of the world’s largest developers, ZeniMax Media, acquired $ 7.5 billion in cash last year.

Discord itself would fit nicely with Microsoft’s Xbox business, where the nascent subscription service Game Pass is made even more attractive with the addition of a high-quality chat and streaming app.

The deal would also mean a big win for Microsoft’s cloud business, Azure. Moving Discord from Google Cloud to the company’s own hosting network would likely help the sales team move the service to other major platforms.

Possible hiccups

However, social media is a tough business, especially with international regulators watching the space so closely. Discord’s track record is certainly not clear: it was used by organizers of the Charlottesville white nationalist rally in 2017, where a violent turnaround resulted in the death of a counter-protester.

The company has since tightened its moderation. In fact, Discord banned a server belonging to the Reddit-based retailer group “r / WallStreetBets”, which was responsible for the GameStop saga – not because of concerns about market manipulation or fraud, but because of the appearance of hateful and discriminatory content.

This is a serious challenge for Microsoft. Discord servers – online areas where strangers can talk to each other via voice chat – are difficult to moderate. Currently, the servers are largely controlled by Discord members themselves who create their own community guidelines. Microsoft’s experience in handling voice chats on the Xbox system should prove helpful. However, due to Discord’s young user base, moderation needs to be even more careful.

Will it work?

The potential Discord deal is Microsoft’s largest acquisition since it bought LinkedIn for $ 26.2 billion in 2016. The forays into social media have not been as successful since then: the company had to last year give up the video game streaming service Mixer after failing to compete with rivals on Twitch, YouTube and Facebook (US: FB) Games.

The problem was that Mixer didn’t have a solid user base – Discord did. Microsoft has been buying for communities to revitalize for a while, and there are few industries that create a sense of togetherness like video games.

However, large, diverse membership is as much a challenge as it is an opportunity. Nadella has the daunting job of cleaning up teenage behavior online and protecting underage users. If Discord eventually shakes its reputation as a gamer and expands to a broader population structure, Microsoft will no doubt also have to fend off allegations of unfair dominance on social media. The deal would arguably fit in very nicely – but investors should be aware that Microsoft may return to the antitrust hurdles it overcame decades ago.

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