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Discord could be Microsoft's $10B key to social gaming

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Discord could be Microsoft's $10B key to social gaming

Amid reports that Microsoft Corp. is mulling a $10 billion buy of gaming chat service Discord Inc., analysts say such a deal would enable Microsoft to tap into the burgeoning social gaming space.

Citing anonymous sources, Bloomberg News this week said Microsoft is in talks to acquire Discord, but that the chat service may instead choose to go public. Though reportedly not yet profitable, Discord has seen its usage — and valuation — rise amid the pandemic as more people utilized the site to discuss popular video games with friends in real time. Microsoft's cloud and gaming businesses have similarly flourished due to pandemic-driven demand.

A deal would benefit both companies, providing Discord with the wherewithal to build out its business while helping Microsoft expand its social networking offerings.

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San Francisco-based Discord has long been the preferred social platform for gamers. Founded in 2015, the service allows users to create and manage private and public communities where they can communicate via direct messaging, voice and video calls and persistent chat rooms.

In lieu of advertising, Discord makes its money from selling premium subscriptions. The company's "Discord Nitro" subscription, for instance, costs $9.99 per month or $99.99 per year and lets users use animated avatars and custom emojis, as well as upload larger file sizes and share their screen in higher resolutions.

Discord's eschewing of targeted ads built around sharing users' private data makes the platform an attractive alternative to larger social platforms like Facebook Inc. that rely on such mechanisms to drive profits, Roseanne Wincek, co-founder and managing director at venture capital firm Renegade Partners, said.

This focus on data privacy drives user loyalty, Wincek said. "The fact that Discord offers this subscription product that's supported on its own and internally … makes you feel a lot better about actually interacting with the platform because you know they're not monetizing you on the backend."

Discord does not disclose detailed user figures or financials, but the company reportedly doubled its monthly user base to 140 million amid the pandemic and generated $130 million in revenue in 2020, up from nearly $45 million the prior year.

The company's massive appeal among gamers is the "varnish" that Microsoft would be able to apply to its other product lines if the deal were to go through, Bruce Daley, a senior research analyst at S&P Global Market Intelligence's 451 Research, said.

"Somewhere in Microsoft's strategy, when they look at Discord, they're saying, 'Well, there's something about the company that we should be able to put what we have and they have together in such a way that it's worth a lot more than $10 billion,'" Daley said.

A public listing, though, could be sizeable. Discord received total funding of $384.4 million in eight rounds with a valuation of about $3.5 billion, according to S&P Global Market Intelligence data. It has been four months since the last funding round.

"If the company does go public, I think it's going to be a phenomenal offering," Wincek said.