At $10 Billion, Discord is a Cheap Buy for Microsoft

Microsoft is betting on a new shift in the consumer internet

Trends are often obvious. But it’s rare for a company to put money where it’s needed, consistently, over the years. That’s what Microsoft is doing these days. It’s buying Discord for $10 billion. If you are like me, Discord sounds like just another unrecognizable messaging platform, but all the young people are on it. 

That’s right. The craze for social media apps is endless. Even Instagram and TikTok look old. Adults are hanging out at Clubhouse. Kids are messaging on Discord. And of course, everyone is playing Roblox.

The Covid lockdown has spurred more than just growth in garden-variety apps and games. The basic nature of the internet is changing too. Microsoft has taken notice and aligned itself with that change.

From Customer-Obsessed to Supplier-Centric

Here’s the thing. So far, the internet has been serving mostly advertisers and end-consumers. It’s great to buy stuff from Amazon. The company does everything imaginable to lower prices while increasing selection and enhancing the buying experience for its paying customers. Amazon has done so in online shopping, cloud computing (AWS), book publishing (Kindle), music and movie streaming (Prime), and now, healthcare (Care).

But it’s not so great when you are trying to sell things through Amazon. 

Amazon’s Marketplace hosts millions of small-business sellers. These are third-party merchants who rely on Amazon to fulfill their orders. They still need to do most of the work: market research, making and sourcing products, and taking individual financial risks. 

But Amazon competes against these merchants. It looks at sales information and then launch its own private labels to sell popular products. Amazon’s versions are, of course, cheaper.

That’s how Shopify has become a rising star. Shopify provides merchants with cloud-based payment and fulfillment services. It gives merchants complete control over branding and marketing. Merchants own the shoppers’ data: who buys what from where and when. In fact, shoppers won’t even know that they are dealing with Shopify. And that’s the point. Shopify exists to serve merchants, never to compete against them. 

What a refreshing way to grow. Investors are also better off choosing Shopify, as I’ve argued here.

Difference in share price performance between Shopify and Amazon

Of course, Amazon is hardly the only platform exploiting suppliers. Uber drivers who work over 10 hours a day receive no health benefits. YouTube’s biggest stars, with more than 10 million weekly views, earn less than $2,000 a month. Most writers on Medium, 94.6% of them to be exact, make less than $100 per month.

Looking around, you’ll begin to see how the entire internet has been built on freelancers who labor for very low wages—or sometimes for free. What started as empowerment for free agents looks increasingly like sharecropping.

All these factors make Discord an interesting acquisition for Microsoft. Through Discord, Microsoft is tapping into the next wave of growth. 

To Flourish in the Creator Economy 

At its core, Discord is like Slack for gamers. Kids use Discord to chat with one another while playing games. And they need to chat so much because these days, video games are highly social. Whether it’s Fortnite or Minecraft, they are often playing with other online gamers in a virtual world. Since there’s no fixed script or predetermined ending, players need to coordinate their strategy. Skype and TeamSpeak try to fill that need, but don’t work as well as Discord. 

And the need to communicate among online gamers only keeps growing. Every kid seems to be on Roblox these days. It’s sort of like Minecraft. Except Roblox is also a playground for anyone to design new games too. You don’t need to be a coder to create. There are numerous free courses available. Kids as young as eight or nine can master its simple code editor. 

Roblox developers make money through in-game purchase of virtual items. Now think about this. Not too long ago, it still took a professional coder to build games like Candy Crush or Farmville. What Roblox has done is to make things so easy that a pre-teen can enjoy their own invention. And wherever there’s a community of inventors, there’s the need to communicate. 

The gaming industry is hardly the only place you are seeing the shifting focus from obsessing over end-consumers to serving independent creators. Substack is helping individual writers to get paid. It doesn’t sell readers’ information to advertisers. It lets writers to charge a subscription fee of their own readers. NFTs promise to help musicians get a decent payday in the age of online music streaming.

One exception is online food delivery. Small restaurants are getting killed by Uber Eats, Door Dash, and Deliveroo. Clearly, the current setup is hardly sustainable. There’s no path toward profitability for all parties, including the platforms themselves. This industry is screaming for help. 

Not the First, Nor the Last Chat App Acquisition by Microsoft

Microsoft didn’t decide to buy Discord for the immediate financial payback, obviously. It would be too expensive to justify such reasoning. But buying it lets Microsoft have a glimpse of what gamers and inventors are playing and working on. Discord has a growing list of more than 140 million monthly active users that includes thousands of top YouTubers. Microsoft wants to own that community. It needs to understand what games are trending, and what features people can’t stop talking about.  

This real-time data can then guide Xbox development, all the way to everything AR—augmented reality. Microsoft doesn’t have to fly blind when innovating anymore. 

In that context, $10 billion to buy a chance to cement the leading position in gaming is not just cheap. For Microsoft, it’s a steal.

 

Stay healthy,

P.S., What’s been your gaming experience? Or that of your children or friends? To what extent we should compensate content creators, freelancers, and small merchants? Have you seen something working for the little guys? Join the discussion. We’d love to hear your thoughts.

This article is co-authored with Angelo Boutalikakis, a research associate at the LEAP Readiness Project.