Credit: Eldin Beganovic via Flickr
Microsoft buying Minecraft was a genius move, and not just because Microsoft has an interest in games. Minecraft is a great franchise.
Firstly, if you think Minecraft's $2 billion purchase price is overvalued, think again. Minecraft is the Lego of the future, and Lego's market value is estimated around $15 billion.
Just like Lego, Minecraft's simplicity makes its durability. Fancy toys come and go, but Lego is always around, today as in our grandparents' day, because with Lego you can make anything.
Minecraft's appeal doesn't depend on whiz-bang technology that can get superseded tomorrow. By the time my children are my age, iPhones and iPads will be obsolete, but my children's children will probably still play Minecraft.
Minecraft is a bit like Twitter in the sense that trying to "improve" on it by adding features would destroy it. No one thinks that they can beat Twitter by coming out with an equivalent of Twitter with 150 characters, because the whole charm and appeal of Twitter lies precisely in the 140 character limit. Similarly, it's Minecraft's simplicity that makes its appeal: Just rough blocks that you pile up. Minecraft can't be overtaken by a version of Minecraft with better graphics or more elaborate gameplay, because its greatness lies precisely in its simplicity.
This yields an important insight: The basic principle of financial valuation says the value of an asset is the net present value of its future cash flows. What this means in English is that the value something is equal to the value of all the money you will make from that thing in the future. So, for example, the value of an apartment or a house is equal to the value of all the rent payments you could make on it -- in today's dollars. Because a dollar today is probably going to be worth more than a dollar a year from now (assuming no deflation, which is historically rarer than inflation), future cash flows are discounted to give their value in today's dollars.
What this means for very long-lasting financial assets, including companies with inherently durable businesses, is that most of the company's value is back-loaded: It comes from cash flows more than ten years in the future. Which means that an inherently durable business is intrinsically very valuable.
Such is the case with Minecraft.
But MInecraft isn't just a smart play for Microsoft -- which, because of the Xbox franchise, has a vested interest in gaming -- because it's a great games franchise.
The appeal of Minecraft is much broader. As the writer Robin Sloan pointed out in an excellent post on MInecraft, Minecraft exists in large part thanks to the strength of its community. Minecraft-the-game has no built-in tutorial. The only way for someone to learn the game is to rely on tutorials -- YouTube videos, wikis, even printed books --made by the Minecraft community. Everything about MInecraft is about the community. There are documentaries and t-shirts and all that good stuff of weird, wonderful online communities that the internet so uniquely enables.
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