When Microsoft says it expects to break-even in over the current fiscal year on its $2.5 billion acquisition of Mojang and its powerhouse franchise Minecraft, it's not saying it expects to make $2.5 billion on the series in that span. It's more like $25 million.
That's because Microsoft couched the "break-even" portion of this as "on a GAAP basis." That means "generally accepted accounting principles."
"Microsoft expects the acquisition to be break-even in FY15 on a GAAP basis."
They're not fudging the numbers — this is "generally accepted" by accountants, investors, bankers, regulators and the like — but analyst Michael Pachter has pointed out that it means something totally different from what laypeople are assuming.
Essentially, Microsoft expects to make more money from Minecraft than it would make if that $2.5 billion sat in the bank for a year and generated $25 million in interest. And yes, given the sales of the game — which just launched on Xbox One and PlayStation 4 — not to mention the merchandise licensing that Minecraft has seen to date, $25 million sounds like a very, very doable number.
Here's Pachter, at the GamesBeat 2014 conference in San Francisco, underway now.
"When [Microsoft says] break even, they don't mean they're going to get $2.5 billion back. That's sunk costs, they don't care," Pachter explains here. "They're talking about from a GAAP reporting perspective [...] they will make more from from Minecraft than they lose from not having that money in the bank generating interest, [which is] not very much."
This is what the financial industry means when it talks about "make your money work for you." Microsoft isn't worried about the $2.5 billion it's shelling out here because it has, like, $85.7 billion in cash (and short term investments) on hand.
So if a chunk of that cash is sitting around making $25 million, and Microsoft can take that chunk and make, what, four or five times that payoff, that's why the deal makes sense. But it doesn't make $2.5 billion.