Microsoft is a tech colossus, but its grand business strategy tends to attract less attention than some of its rivals. On the latest Pivot podcast, Kara Swisher and Scott Galloway discuss the company’s deliberate approach to acquisitions, and the upside of its latest target, Discord.
Kara Swisher: Microsoft is in talks to acquire Discord, a social media for video gamers. It’s a pretty cool social-media app — it’s been used for a lot during the pandemic. The deal, which is not official, could reportedly amount to over $10 billion. Discord has 100 million active monthly users, and has of course gained popularity in the pandemic. They’re using it for all kinds of other things besides gaming: books and talking, and this and that. It’s been a huge year for video-gaming companies, and Microsoft has bolstered much of its gaming business with acquisitions. In September, it bought ZeniMax media, the parent company of several large gaming studios for $7.5 billion.
Now, we’re not gaming experts, but this is interesting. Microsoft seems very canny these days. There’s all kinds of things going on in the gaming industry, but any thoughts, Scott?
Scott Galloway: The best acquisition of 2020 — and I don’t like the company, but it was the best acquisition of 2020 — was when Uber acquired Postmates and diversified away. They turned the pandemic from a bug into a feature and they diversified.
The best acquisition of 2021 is this one. And when you read more about it, this calls on so many key business trends that Satya Nadella clearly gets. The most accretive business action in history is — and I know you’re sick of me saying this — moving from transactional episodic revenues to recurring consistent revenue.
Swisher: Rundles. I’m never sick of the rundles, Scott.
Galloway: Anyways, people don’t talk about it, but the most powerful rundle in the world is a B2B rundle, specifically Microsoft Office into Enterprise.
Swisher: Yes indeed.
Galloway: You’ve got to imagine 99.7 percent of all corporations with more than ten people pay recurring revenue fees for Office. And it’s consistent. If you renew, that means you’re in business; if you don’t renew, it means you went out of business. So it’s the most powerful B2B bundle in the world. Now, let’s talk about the most powerful B2C ones. There’s Amazon Prime, there’s Netflix. Apple One now has 23 percent of their revenues from a recurring revenue stream. And you’re going to have one company, Microsoft, that has two top-ten rundles. One is B2B, and one is B2C because they will tack this onto their Microsoft or their X-Box games plan. Also, Discord has a Nitro plan — $9.99 a month, $100 bucks a year. So Microsoft will be the only firm in the world that has two of the top-ten rundles, one B2B and one B2C. And I think this will probably make Microsoft again the most valuable company in the world.
Swisher: What’s interesting is this is so social. Microsoft made investments in Facebook and others, but not like this. I have kids who play video games, and it’s so social. And Discord, I think, has done a nice job here beyond just games. They’ve done other things. They’ve created a community.
Galloway: It’s where people went to talk about Black Lives Matter.
Swisher: It’s sort of a much healthier social network in a lot of ways, because it’s got a goal, I guess. But I think it’s perfect for Microsoft as an add-on to games that are, because it owns Minecraft, it owns a lot of things. So it sort of dominates this area.
Galloway: Well, it also taps into the kind of fourth big tectonic shift in our economy, and that is dispersion. Because it’s an underlying platform for game developers to develop games and then go direct to consumer. And that’s kind of the same platform or strategy as Roblox. And in my view, that is what Bitcoin’s all about or crypto. It’s basically saying, “How do we take out the traditional channels of distribution that are creating friction and unnecessary expense?” And also, nothing works in terms of consumer preference and product development like the consumer.
What’s so powerful about Roblox is they say, “Okay, we’ll create a platform for creators,” similar to what TikTok’s doing. It’s skipping traditional channels of distribution or supply chain to add more value to the end consumer, or award more than spoils to the original creator.
Swisher: So should Microsoft buy Roblox? They bought GitHub. I feel like I’m not smart enough to understand what Satya Nadella is doing here. It doesn’t feel random like some acquisitions do.
Galloway: They not only have the traditional studio model, where they produce games and put up $100 or $200 million behind a huge game — they also have this community-driven game platform. That’s really powerful, really powerful. I think you’re right: Microsoft has done such a great job of keeping a low profile. Really incredibly impressive the way they’ve handled themselves.
Swisher: I feel like I have to go see him and have him explain to me what he’s doing. You know what I mean? Because he’s such a calm guy. He’s very good at doubling down in the areas they’re good at. The one miss I think that they had was with Skype. They really didn’t leverage that in the way that they might have. They’ve been pushing heavy into Teams and other things around the pandemic. And they probably should’ve gotten Slack, I would guess, rather than Salesforce. But Skype is the only area I see where they didn’t really do as much as they should have in things that are naturally theirs.
Galloway: I don’t think they could have gone after Slack, because they have a great product with Teams. Instead they developed Teams. And not only that — if Slack didn’t work, I think they would be accused of a tackle kill, and I think that would raise a lot of alarms.
Swisher: Fair. We think Satya Nadella is brilliant right now.
Pivot is produced by Rebecca Sananes.
This transcript has been edited for length and clarity.