Discord, a social media platform particularly popular among gamers, is reportedly in talks with Microsoft for a deal that could top 10 billion USD.
According to sources briefed on the matter, who declined to be identified since the talks are confidential, the talks were prefatory, and no transaction is imminent. The discussions have taken place as video gaming has flourished in the pandemic (1), and Microsoft, among the most valuable tech firms across the globe, has bolstered its gaming business with deals and acquisitions.
It is worth highlighting that several Microsoft acquisitions in the past few years have focused on online communities like its deals of GitHub, LinkedIn, and Minecraft’s gaming developer. In the previous summer, Microsoft was in talks to acquire the video application TikTok, in what would have been a blockbuster takeover. However, the talks later fell apart. In September, Microsoft also purchased ZeniMax Media, a parent firm of multiple large gaming studios, for 7.5 billion USD (2).
Discord, with more than 150 million monthly active users, has been highly popular in the coronavirus pandemic as people used the platform to chat with one another while playing games. The San Francisco-based company has secured over 600 million USD funds since its inception in 2014. According to another source with knowledge on the matter, it is currently in preliminary deal talks with several other suitors, including Amazon and Epic Games.
Apart from an acquisition deal, the privately held firm, which investors valued at 7 billion USD last December, is also a candidate for an IPO. This month, Discord hired its first CFO, Chief Financial Officer, indicating that the company may be preparing to go public.
There have been no comments from both Discord and Microsoft spokespeople on the development.
According to Joost Van Dreunen, a New York University professor studying the video games business, stated that if a deal happens, Discord would be a natural fit with Microsoft’s Xbox video gaming business. He further added Microsoft has been building hardware, purchasing software, and it is now finally sewing it all with each other with the connective tissue of a communication layer.
Microsoft stated that it wants to make it easier for people to play games at their homes on its Xbox consoles or to go on their mobile phones. In the past three months of 2020, Microsoft’s gaming business has generated more than 5 billion USD revenue for the first time after releasing new Xbox consoles (3).
What is Discord?
Jasin Citron and Stand Vishnevskiy, programmers and entrepreneurs, founded Discord in 2015 as a space for video game players to hang out and chat in real-time while gaming (4).
While Discord is particularly popular among gamers, anyone can use the instant messaging and digital distribution platform to create online communities and facilitate conversations with other fans.
Users can communicate with each other via text and visual media similar to other online forums such as Reddit as part of dedicated communities called servers, themselves collections of persistent voice chat channels and chat rooms. The app allows people to create private servers, like small communities, featured with audio, text, and video chat options. While it is currently free to use, it does offer a 10 USD per month ‘Nitro’ subscription with extra features.
It received mainstream attention as a gathering place for the far right, who used Discord to organize the white nationalist rally in Charlottesville, 2017.
Since then, Discord has implemented stricter content moderation rules and has banned alt-right communities.
After that, it quickly became widely used by tournaments and esports gamers as a communication tool. However, Citron has stated that the app made no moves to target a specific audience.
Discord’s link in the gaming community became stronger in 2017 when it started allowing game publishers and developers to verify their servers. In 2018, Microsoft announced that it would offer Discord support for Xbox Live users, allowing them to link their accounts to connect with the Xbox Live friends list via Discord (5).
Discord has announced its plans to expand beyond gaming into day-to-day usage among online groups of all kinds last year in the past few months. And it has sought to change its motto from ‘chat for gamers’ to ‘chat for communities and friends’ in response to a surge in users amid the coronavirus pandemic. Notably, there are now people who use Discord for activities such as college classes and organizing events like the Black Lives Matter protests.
It crossed the 100 million USD revenue mark last year, said the source. Discord makes money through selling subscriptions to a premium version of the service (6).
The Meaning of Buyout for Users
Microsoft’s potential buyout is reminiscent of its 2011 deal with Skype, which subsequently witnessed the merger of a video-chat app with its Xbox gaming platform for ease of use on gaming consoles.
If Microsoft is to acquire Discord, a similar integration is likely to become a reality on the tech giant’s latest Xbox machines batch, the Series S and X.
We are yet to see what precisely it would mean, but some experts suggest that Microsoft could be looking to bundle Discord Nitro perks with its popular Game Pass service.
As per Matthew Kanterman, an analyst at Bloomberg Intelligence (7), Microsoft possibly acquiring Discord makes a lot of sense since it continues to reshape its gaming business more towards services and software. There is a big opportunity to bundle Nitro, Discord’s premium offering, into the Game Pass service.
Notably, Game Pass allows users to access the 100s of ready-to-download games for a monthly fee and comes with many extras, making it arguably one of the best deals in gaming.
No doubt that adding Discord to the portfolio would only sweeten the deal for several gamers and boost its already impressive subscriber count, which currently stands at about 18 million across the globe.
Kanterman stated that there are expectations that Xbox would remain acquisitive to keep bolstering the value propositions of Game Pass and drive subscriptions higher.
Why Might Discord Be Selling?
The platform has increased in popularity since its initial launch. However, it is yet to see an annual profit. Reports suggest that that’s what has led the company, Discord Inc, to look for alternative avenues to generate cash.
Bloomberg’s report (8) also suggested that Discord may eventually eschew its selling idea altogether and decide to go public and float on the stock exchange instead.
According to VentureBeat’s report (9), Discord is currently in active discussions with a select few parties. The market is in a state where it could seek strong double-digit billions of dollars. The reports further suggest that multiple unnamed parties are interested in purchasing the chat platform. However, one potential purchaser has signed an agreement with Discord to move the negotiations to a near-final stage.
Discord has officially declined requests for any comments on the grounds that it won’t talk about speculation or rumor.
Any potential sale would be big since the video game industry has already witnessed explosive past months thanks to big-ticket events like 7.5 billion USD ZeniMax Media-Microsoft deals, and Roblox’s big direct listing (10). Discord itself had also captured attention before these sales rumors, with it bagging an additional 100 million USD funds near the end of 2020.
VentureBeat report further noted that the ball is mainly in Discord’s court. It has previously turned down sales opportunities over incongruencies between its leadership and potential buyers, imagining its next steps.
Why is Microsoft in The Bid for Discord?
Microsoft has a long history with messaging apps. Whether it is nostalgic memories of MSN messenger or more recent efforts with Microsoft Teams, communication is essentially foundational to every Microsoft vertical. It has also had a long and storied history of failure in the area. Despite acquiring Skype, the relevancy of Skype as a platform has deteriorated (11) in recent years in favor of speedier competitors such as Telegram and WhatsApp or more connected social networking platforms such as Facebook Messenger.
Skype has still attained its footing as a back-end service for products such as Microsoft Teams and Xbox Live, which have tens of millions of monthly active users. Still, there are big holes in the tech giant’s ability to engage users within its own communication platforms, particularly in building communities or running small businesses.
When reports came that gaming-oriented messaging platform Discord is looking to sell for upwards of 10 billion USD (12), one can assume that Microsoft is in the running to be among those to acquire the platform, considering that it aligns almost flawlessly with its plan for the future of gaming. It could also advance the company’s business aspirations conceding that it is arguably more instinctive for smaller businesses than Microsoft Teams since they don’t need the scale or enterprise-grade integrations the latter offers.
There are various reasons why we believe that Microsoft should certainly look to place itself in the bidding war for this quote if it is not already at the fore.
Even though we hate to say it, Skype, Microsoft Teams, and Xbox Live messaging are all pretty awful at doing their jobs, in general (13). Skype continues to exist among the more reliable services for video and voice communication. Xbox Live party chats typically do the job of group voice in gaming. However, they have all fallen quite far behind competing services because of the absence of innovation.
If we are fair to Microsoft Teams, it does things at scale for enterprises that competing solutions cannot offer. On the other hand, a user in a mid-size business who only needs fundamental communication and file sharing, Microsoft’s rivals seem to have an edge for the basics.
Microsoft is an overgrown corporate giant that fails to meet smaller and more agile teams’ innovation pace. Several others represent it as succinctly as Discord, which not only destroys Skype and Xbox Live at texting, usability, and mobile quality but even better than Microsoft Teams as an environment for professional use. Discord has an abundance of mature services, bots, and tools that can transform basic Discord servers into productivity powerhouses with only a handful of simple tweaks (14).
When Microsoft decided to shut MSN messenger in favor of Skye, several were left scratching their heads over it since MSN was faster than Skype and had a more inclusive interface, and frankly, it still does (15).
While we are not sure why, it seems absurd that in 2021, Xbox Live and Skype messaging services still lag behind the competition in speed, it doesn’t feel good to send text over Skype-based services and watching the app struggle to open even on the world’s most powerful phones and PCs while Whatsapp and Telegram and crucially, Discord, all open at an instant.
After years of failed efforts to rebrand and rebuild Skype, Microsoft is still inadequate to improve even the most fundamental aspects of the service. Hence, we can say that there must be something fundamentally wrong with it. What more could it be? We think that it is the right time for Microsoft to cut loose and move on.
Secondly, Microsoft has already worked closely with Discord recently. There is an indication that the tech giant is looking at even deeper integration between Xbox messaging and Discord in the upcoming future. It could be a hint that Microsoft is indeed in the bidding to acquire the service, which is compatible across the board with the gaming communities everywhere.
In the past, Microsoft has attempted to emulate Discord’s features in some ways. Microsoft’s Xbox Clubs feature started fairly promisingly, and we have seen designs that would have regarded Xbox Clubs become even more Discord-like. However, those updates never materialized as Discord’s popularity continues to gain space.
There have been several discussions about why Microsoft can not ignore the rise of Discord, and it had become quite apparent that Discord would eventually join a larger tech company. It was merely a question of when and who (16).
Microsoft essentially has two choices – to build up its competing services or acquire Discord. The former has not happened. Xbox Live and Xbox Club haven’t had significant upgrades in what feels like forever. They fall behind Discord and other instant messaging services across mobile applications and PCs, where Microsoft aims to deliver the majority of its growth for Xbox Game Pass in the upcoming future.
Microsoft also missed the boat with streaming, as it failed to catch up to Amazon’s Twitch with Mixer (17). And suppose it allows Discord to go to Amazon or another competitor. In that case, it could potentially end badly for the tech giant, particularly if Amazon integrates Discord with Twitch and its home-grown PC game streaming service Amazon Luna.
Microsoft’s attempt to purchase TikTok last summer indicates that Microsoft knows the importance of social media platforms. In several ways, social media is the mucilage that many of the tech giant’s services lack. While Discord is not a full-blown social media in the same way as Twitter or YouTube, it is crucially social to build communities and re-engage users passionate about a whole range of subjects and topics. It is also faster and more intuitive than Microsoft Teams, making it more productive for smaller teams who don’t need powerful enterprise-level integrations.
Lastly, Microsoft’s home-grown consumer-oriented social platforms have slumped too far behind their competitors to ever overtake at this point. Redmond has found success with LinkedIn and Microsoft Teams. However, Discord’s tech could become the glue that makes Microsoft’s services and features more special for regular users with its superior fundamental services and an improved user experience (18).
It is also worth saying that whoever gets Discord would gain a significant advantage over Microsoft’s entire service portfolio. Suppose it is forced to continue using the dinosaurian Skype as a primary mode of communication. It is one deal Microsoft can’t afford to slip away.
Suppose we allow ourselves to move past the standalone absurdity of the figure. In that case, the question becomes, is Discord worth that much? The answer to that ultimately leads us to analyze many figures that are quite frankly too boring to consider discussing extensively. However, when we talk of Discord and Microsoft merely as video gaming companies, we can see that it makes a lot of sense why the tech giant is ready to spend whatever it takes to acquire Discord.
Hence, if you had thought that Microsoft’s high-profile acquisition of Bethesda (19) would be its last big-ticket purchase for a while, then we must consider why Microsoft’s potential multi-billion-dollar Discord deal makes sense.
We know that Discord is ridiculously popular as it is closing the gap with Twitter in terms of average monthly users. More than 150 million people use the platform regularly every month and have come to rely on it as the default online communication platform. And we have already talked about its multi-use functionality, which offers a stellar solution to an industry issue that has prevailed for far too long.
Even though Discord won’t be replacing Zoom and Slack in the office environment soon, as more people have included voice and video communication services into their everyday lives, Discord will gain steam as a video-based platform that offers community-building options.
The success of Discord’s rival services, such as Clubhouse (20), points that there is absolutely a huge market for such kinds of social media platforms that emphasize smaller, more focused communities and direct communication. And why wouldn’t Microsoft want to get on the movement?
In several ways, Discord is the communication service that Sony and Nintendo have been chasing for a while now. It is most certainly better than any similar services that Microsoft could have created from scratch, especially since the fall of Skype. In the battle to ‘steal’ Discord, Microsoft is probably making the best move by accepting that they have been defeated and paying whatever it needs to acquire what is seen as a valuable gaming asset.