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Game On! Why Microsoft's $2.5 Billion Minecraft Deal Could Be a Steal.

Redmond gets its hands on a wildly profitable game with a devoted following.

What is Minecraft, and why is Microsoft getting ready to pay as much as $2.5 billion for it?

The first answer is easy: Minecraft is a wildly popular computer game — think virtual Legos — that generates real money — both revenue and profits — for its owner, Stockholm-based developer Mojang AB.

The second part is a little harder to answer, since up until now Microsoft has not been in the business of buying big gaming companies, profitable or not.

And since we’re asking questions, we might as well wonder why other potential acquirers — both traditional gaming companies like Electronic Arts and Activision, as well as big Web players with logical ties to Minecraft, like Google/YouTube and Amazon — didn’t end up with the company.

For now, here’s what we do know: The acquisition, first reported by the Wall Street Journal, appears to be in its final stages. A person familiar with the negotiations says Microsoft could end up paying up to $2.5 billion, including earnouts and other bonuses, for Mojang.

That sum will get Microsoft a very small company — Mojang has a mere 28 employees — but a very profitable one. Last year the company reported profits of $126 million in 2013 on revenue of $289 million; 42 percent of that goes to Notch Enterprises, created by Minecraft inventor Markus “Notch” Persson. Microsoft’s purchase price — if the deal goes through — would be close to 20 times profit.

Mojang makes most of that money with a very simple business model: It sells lots of software for a modest one-time fee. Minecraft players generally pay around $20 to play on consoles like Microsoft’s Xbox and PC, and $7 on mobile. Mojang has sold more than 50 million copies in the past five years, the company reported in June.

Minecraft invites players to explore and build in a Lego-like world of blocks that can be endlessly destroyed, combined and crafted. Players can roam solo or play together online or, in some versions of the game, on the same screen. The openness of the game and its plethora of hidden secrets have made it a huge hit on online video channels like Twitch, which Amazon is about to acquire, and Google’s YouTube.

Minecraft started as a game on the PC, finding early success in independent game circles, and in 2012 came to Microsoft’s Xbox 360 by way of a third-party company, 4J Studios.

The acquisition will give Microsoft a game with hugely passionate players and sustained popularity on its Xbox, which has lately fallen behind Sony’s PlayStation 4.

Most importantly, it means Microsoft now makes games for not just its own devices, but also Sony’s, as well as iOS and Android machines. In Apple’s app Store, Minecraft is one of the few high-charting paid titles in a sea of free-to-play games.

While Microsoft has kept Halo, its hit game for the Xbox, exclusive to that platform, it’s hard to imagine the company shutting down Minecraft on rival platforms. But it is possible to imagine them turning Xbox versions of the game into the “best” versions, perhaps by offering special features there exclusively.

The popularity of PC Minecraft, which Mojang develops in-house along with the mobile version, could also buttress Microsoft’s “renewed focus” on PC gaming, a strategy Xbox head Phil Spencer talked about at this year’s Game Developer’s Conference. Microsoft’s “computing and gaming hardware” business, dominated by Xbox and Xbox software sales, generated $9.6 billion in the 12 months that ended in July.

Persson, who handed leadership of Minecraft over to Mojang colleague Jens Bergensten in 2011, has nevertheless remained an active presence in the online Minecraft community, especially on his candid Twitter account. In the past, he has picked fights with many large tech companies, including Microsoft:

Earlier this year, following Facebook’s acquisition of Oculus VR, Persson announced that he had canceled plans to bring Minecraft to the Oculus Rift virtual reality headset, because “Facebook creeps [him] out.” Last month, Oculus CTO John Carmack issued a public olive branch to get the game on his platform.

Microsoft declined to comment for this story.

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