Microsoft announced this week that it's buying hugely popular game franchise Minecraft for $2.5 billion. For that money, Microsoft gets rights to the game and ownership of its Stockholm, Sweden-based development studio, Mojang. It doesn't retain the company's founders or Minecraft's infamously outspoken creator, Markus "Notch" Persson.
Does that sound like a lot, $2.5 billion? Well, it is in human dollars, but not so much when you're Microsoft and you've got $85 billion in "cash, cash equivalents and short-term investments." Regardless of the fact that this week's deal only cost Microsoft around 3 percent of that, here's the real kicker (in the form of a statement from Microsoft): "Microsoft expects the acquisition to be break-even in FY15 on a GAAP basis." Woof, that's a doozy of a sentence right there.
Here's the translation: Microsoft expects the purchase of Minecraft/Mojang to make it a lot of money. And that is why Microsoft bought Minecraft.
Admittedly, that's a rough translation of all that Microsoft's saying in that jargon-filled sentence. And it's a crucial statement in the several-paragraphs-long press release that announced the deal. So let's break it down, piece by piece!
A trailer for Minecraft's recently released Xbox One version
- "Microsoft expects the acquisition to be break-even ..."
This one sounds simple, but there's a lot of information in there. First and foremost, "Microsoft expects" is a heavily abridged way of saying, "Microsoft lawyers and accountants painstakingly went over the past financials of Mojang and projected earnings for the next two to five years. After doing that work, we expect these results." Companies don't "expect" anything they haven't deliberately calculated. This is not a guess; it's an equation.
The middle bit -- "the acquisition" -- is simply referring to the purchase of Minecraft and Mojang for $2.5 billion. Nothing hidden there.
To be break-even" isn't to say, Minecraft and Mojang will recoup the full $2.5 billion Microsoft spent on the acquisition. Instead, it only has to make about $25 million to make this a "break-even" deal. Why? Well, as reported in Polygon
, analyst Michael Patcher pointed out
in a talk at Games Beat 2014 that $25 million is about the amount of interest Microsoft could expect to make if it just left that money in the bank. As he puts it:
"Well, $2.5 billion, the interest on that is just $25 million a year. When they say break-even they don't mean they're going to get $2.5 billion back. That's sunk cost, they don't care. They're talking about from a GAAP reporting perspective - EPS Microsoft Corporation - they will make more from Minecraft than they lose from not having that money in the bank, generating interest ..."
Okay, bear with me -- this isn't as complex as it sounds. "In FY15" directly translates to "in Fiscal Year 2015." To understand what that means, we have to understand how Microsoft's fiscal year works (surprise: It's not the same as the calendar year the rest of us exist in). Microsoft's fiscal year begins on July 1st and ends on June 30th, every year. Despite it being calendar year 2014, Microsoft's in fiscal year 2015 right now. So!
If Microsoft is in "FY15" right now, and the company's fiscal year ends on June 30th, Microsoft expects to break even on its purchase by June 30, 2015.