Last week, Bloomberg reported that Microsoft is exploring an acquisition of Discord for $10B+. Discord, a social communication platform that gamers use to congregate, coordinate, and communicate about their favorite titles, has been a prime M&A target for some time. Yet how real these negotiations are remains to be seen. Bloomberg’s sources claimed that Discord is more likely to IPO than sell itself while a Wall Street Journal piece from later in the week suggested that a deal could close as early as next month. Eventual outcome aside, however, Microsoft’s interest in Discord reveals much about the tech giant's strategic imperatives and deserves a deeper dive into this deal's obvious and less obvious implications.
Much of the commentary around this tie up has framed Microsoft’s appetite for Discord as a doubling down on its Xbox gaming division – falling in line with Microsoft’s $7.5B acquisition of game publisher Zenimax Media late last year and the company’s ongoing investments into Xbox Cloud Gaming. Discord boasts a 140M+ community of deeply engaged MAUs and controlling one of gaming’s most popular digital “third places” would undoubtedly give Microsoft greater ownership of and insight into the consumer behaviors of a key, high growth, segment of its business. This in turn, could be leveraged to drive more efficient customer acquisition/retention for Xbox hardware and subscriptions while also informing stickier UX improvements/game development for Microsoft’s game studios.
That said, after it was burned by similar logic with the now defunct live-streaming platform Mixer, proximity to the gamer community alone shouldn’t warrant Microsoft paying a 75X+ multiple on revenue (estimates put Discord’s 2020 revenue at $130M) for another unprofitable social platform. Now, could Microsoft recoup some of that price tag by migrating the Discord’s cloud infrastructure to Azure? Could it leverage Discord’s data and tools across its own core business or introduce further monetization without alienating the highly sensitive gamer base that call the platform home? Yes, likely and maybe. Keep in mind that Microsoft has cash, scale, and time on its side to address these concerns. As friend of Spotlit and former EA partner manager to Discord, Rohith Thumati put it “Discord‘s losses are a rounding error to Microsoft, so the pressure to be a profit center won’t be there as long as the core product helps entrench Microsoft in consumers’ lives.”
More importantly, if we consider how Discord would both entrench and expand Microsoft’s value prop with enterprise customers then this price tag begins to make a lot more sense. That’s where most of the commentary gets a potential acquisition of Discord wrong. An engaged community of gamers is incredibly valuable, but a fully developed feature set that that can deepen customer lock-in across the organization would be priceless for Microsoft in today’s ultra-competitive B2B market. Thus should an acquisition close, watch for the following "non-gaming" initiatives to take shape:
A Holistic, Turnkey WFH Solution – Between Office, Teams, and Skype, Microsoft was perhaps the best positioned company on paper to capitalize on 2020’s shift to work-from-home. In reality, however, 2020 became a nail in the coffin for Skype while competition from Google Workspace, Slack (+55% rev YoY), Zoom (+326% rev YoY), and others ramped up significantly. Discord thus offers a compelling opportunity for Microsoft to wrap a high quality, youth branded communication infrastructure around its industry standard but aging productivity software (~50% of Teams customers are 45+). Reorienting Teams and Office 365 collaboration tools around Discord’s seamless chat to audio to video modality would create a comprehensive enterprise solution with sustainable demand. Note that with that framing, Discord’s $10B+ valuation looks remarkably similar to the $27.7B Salesforce paid to pursue a similar strategy via its acquisition of Slack.
LinkedIn’s Social Audio Shortcut – For all the hype, funding and endless push notifications that Clubhouse has generated in the past few months, Discord has been perfecting audio communication since it’s 2015 inception and just yesterday rolled out its own social audio feature set. Nonetheless, perception of Clubhouse and Discord's particular communities has defined the types of users attracted to each - Clubhouse skews more Jared Leto loving VC Bro while Discord has established itself as the home to gamers and their many eclectic sub-communities. Integrating Discord functionality into LinkedIn would accelerate the career development / networking platform's own efforts in the social audio space, broaden the core user base of Discord into a more professional environments, and help defend against Clubhouse’s encroachment on its dominant position in B2B social and thought leadership.
Bolstering Azure’s Developer Cred – One can assume that an acquisition would result in Microsoft migrating Discord from its current home on Google Cloud Platform to Microsoft’s own cloud service solution Azure. Not only would this significantly reduce Discord’s server infrastructure costs (likely the most expensive line item on the P&L), but it would also provide an incremental boost to Azure's overall market share. While Discord’s business wouldn’t be enough for Azure to catch up to AWS all at once, integrating Discord’s communication functionality into Azure’s stack of native integrations would also establish Microsoft as the optimal partner for the growing segment of game developers that use cloud services to develop and host their titles. This added domain expertise could be all the ammunition Microsoft sales teams need to fight their way to the top.
