Why Microsoft is buying 'Minecraft'

Microsoft to buy 'Minecraft' developer Mojang
Microsoft to buy 'Minecraft' developer Mojang   

Microsoft's potential purchase of Mojang, the Swedish company behind the popular block-building video game "Minecraft," may not be a big deal financially, but it could be the winning ticket to expanding its mobile business, analysts said.

The U.S. tech giant is in discussions to buy Mojang for an estimated $2 billion, The Wall Street Journalreported earlier this week, a deal analysts don't expect to impact Microsoft's profits given that it's roughly 2 percent of Microsoft's $86 billion cash hoard as of the end of June.

"This is pocket change for Microsoft; they spend more than that in their quarterly dividend. It's a move that gets headlines but in terms of its impact on Microsoft's top-line or bottom-line, it's going to be minor," said Charles Sizemore, CIO at Sizemore Capital Management.

In 2013, Mojang had total revenue of around $330 million and profits of $128 million; "Minecraft" makes up 90 percent of Mojang's revenues.

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Business opportunities

With a 100 million registered users worldwide as of February 2014 and strong profitability, "Minecraft" could be an opportunity for Microsoft to leverage its mobile and software businesses, Norman Young, senior equity analyst at Morningstar, told CNBC on Thursday.

Students pose as Minecraft game characters.
Marvin Joseph | The Washington Post | Getty Images
Students pose as Minecraft game characters.

"It's a strong signal that Microsoft is pretty invested in mobile strategy and the Windows Phone. They want to be able to offer different games and strategies across different platforms even if they are not the platform. The IP (intellectual property) side of this equation is very important, the fact that this is a gaming platform that can be played on Android, IOS, PCs and different consoles," Young said.

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"They may be overpaying but if they're smart about it, it's not just the videogame, it's leveraging the IP behind the game," he added.

The deal would be Microsoft's first multibillion-dollar acquisition since new chief executive Satya Nadella took over earlier this year.

Microsoft made it clear to investors that mobile remains a priority after completing the acquisition of Nokia's mobile phone business in April.

"We believe the potential acquisition of the ubiquitous "Minecraft" game (almost 54 million copies sold), would strategically make sense as the company looks for ways to drive users toward its nascent mobile hardware business, where it can leverage and cross-sell a wide range of its higher-margin software," said Daniel Ives, analyst at FBR Capital Markets, in a report on Thursday.

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Sundar Pichai, senior vice president of Android, Chrome and Apps for Google Inc., speaks during the Google I/O Annual Developers Conference in San Francisco, California.
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Mobile versus cloud

But not everyone is convinced; some experts believe the acquisition would go against Microsoft's concentration on cloud services.

"What's interesting to me is that Nadella, when he took over Microsoft, said he wanted to make Microsoft first and foremost a cloud and business services company. He really downplayed videogames and here, he seems like he's doing an about face by making a high profile purchase," said Charles Sizemore, CIO at Sizemore Capital Management.

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In March, Nadella presented his "Mobile First, Cloud First" strategy, focused on developing cloud-enabled software to be deployable on mobile devices.

"My question is: what is his plan? It has to be bigger than just buying this video game. Is Microsoft planning to turn this into a big franchise? Are they planning to make this the Lego of video games? I'd like to see more information. Right now, in a vacuum, it does raise a lot of questions," Sizemore said.

According to FBR Capital Markets, the deal would enable Microsoft to "remain laser-focused on strategic growth areas (cloud/mobile) going forward and continue to capitalize on current momentum from Azure and Office 365 offerings."

FBR currently has an "outperform" rating on the stock.

By CNBC's Nyshka Chandran