Why Microsoft is clawing at social media

Microsoft (US:MSFT) is one of the most appealing names in American tech. Its office software is ubiquitous, its reputation is near pristine and it cleared its antitrust hurdles in the early 2000s. So why is it trying to delve into the uglier, volatile world of social media - especially while the industry is under intense scrutiny by regulators? 

In the past year alone Microsoft has been in discussions to buy TikTok, the video app from Chinese tech giant ByteDance, Pinterest (US:PIN), the digital mood board platform, and now, apparently, Discord. 

Its attempts at TikTok and Pinterest proved fruitless. But third time could be the charm. The Wall Street Journal reported last week that the tech giant is in exclusive, advanced talks to buy messaging platform Discord in a deal that could be worth upwards of $10bn - and might complete by the end of April, if negotiations do not fall through. 

Dis-what?

Readers may be scratching their heads at that massive price tag. But the platform is hugely popular among gamers and teenagers, with more than 100m monthly active users. It has grown in just six years to more than half the size of Twitter’s (US:TWT) average monetisable daily active user base. Little wonder, perhaps, that it is attracting takeover attention.  

The service offers voice, video and text chat features, as well as the option to live stream game play - putting it against Amazon’s (US:AMZN) rival service, Twitch. Discord’s rise has also happily coincided with the growth of ‘e-sports’, the increasingly profitable pursuit of competing in international video game tournaments. 

But Discord is free at point of use, with no advertising. Instead, it makes money from its ‘Nitro’ subscpription service, where members pay $10 a month in exchange for custom tags, the ability to upload larger files and stream at a higher video quality. 

This ‘freemium’ model is proving to be a hit. According to The Wall Street Journal, the platform’s valuation has doubled to $7bn over the past year, following a December funding round. Reports suggest it still has not managed to turn a profit - but, like a number of young tech companies, growth is the name of the game. And Discord is winning at it. 

In fact, there had been some signs that the business was considering an initial public offering (IPO) - including hiring its first chief financial officer, Tomasz Marcinkowski, earlier in March. 

A fit for Microsoft

“Much of technology has been slanted towards consumption,” Microsoft head Satya Nadella said in 2016. “That technology has a place in our lives, but I feel the next 10 years will be technology that enables profound creation.”

That prediction was spot on. Tech firms that place user generated content at their core have started to grow at dizzying rates. Take TikTok and Pinterest - both have buzzing communities, who are largely responsible for the high quality content that appears on their platforms. Roblox (US:RBLX), the digital space where users develop their own video games, has taken off over the past year. Daily active users (DAUs) jumped 85 per cent to 32.6m in 2020. 

The similar marriage of social media and gaming at Discord has fostered an equally active, engaged user base. And Microsoft has already proved that it is serious about getting much bigger in video games, after its $7.5bn cash acquisition of one of the largest developers in the world, ZeniMax Media, last year. 

Discord itself would sit nicely alongside Microsoft’s Xbox business, where its nascent ‘Game Pass’ subscription service would be made more compelling by the addition of a high-quality chat and streaming app. 

The deal would also represent a big win for Microsoft’s cloud business, Azure. Moving Discord away from Google Cloud and onto the company’s own hosting network would be likely to help its sales team to pedal the service to other big platforms. 

Potential hiccups 

But social media is a tricky business to operate in, especially with international regulators watching the space so closely. Discord’s track record is certainly not clear: it had been used by organisers of the white nationalist rally in Charlottesville in 2017, where a counter protester died. 

The company has tightened its moderation since. In fact, Discord banned a server made by the Reddit-native ‘r/WallStreetBets’ trader group, who were responsible for the GameStop saga  - not over concerns of market manipulation or fraud, but because of the appearance of hateful and discriminatory content. 

This poses a serious challenge for Microsoft. Discord ‘servers’ - online spaces where strangers can talk to each other over voice chat - are difficult to moderate. At the moment, the servers are largely controlled by Discord members themselves, who create their own community guidelines. Microsoft’s experience in dealing with voice chats on the Xbox system should prove helpful, but Discord’s young user base means that it will have to be even more careful around moderation. 

Will it work?

The potential Discord deal will mark Microsoft’s largest acquisition since its $26.2bn purchase of LinkedIn in 2016. Its forays into social media since have not been so successful: last year it was forced to give up on Mixer, its videogame streaming service, after it failed to compete with rivals at Twitch, YouTube and Facebook (US:FB) gaming. 

The problem was that Mixer did not have a committed user base behind it - Discord does. Microsoft has been shopping for communities to pick up for some time now, and there are few industries that create a sense of togetherness like video games. 

But a big, diverse membership also presents as much of a challenge as it does an opportunity. Nadella has the difficult task of cleaning up teenage online behaviour, as well as keeping underage users safe. If Discord does eventually shake off its gamer reputation and expand into wider demographics, no doubt Microsoft will also have to fend off accusations of an unfair dominance in social media. The deal would arguably make a very nice fit - but investors should be wary that it could end up with Microsoft circling back to the antitrust hurdles it cleared decades ago.