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Microsoft Will Not Spin Off Xbox, Unless They Abdicate The Company’s Larger Strategic Direction

A story published by Bloomberg floats the idea that Microsoft might spin off its Xbox business, which it calls “more likely [following current CEO Steve Ballmer's] exit.” The publication values Xbox at around $17 billion, a figure based on a comparative revenue multiple with Nintendo.

This is precisely the sort of bilge that cavorts and pretends to be serious analysis. The Bloomberg piece leans on the words of a fund manager, Todd Lowenstein, who claims that Xbox “looks like an attractive standalone business that could hold up on its own.” He continues that it “seems like it would be the most mature candidate with the best growth potential and the most established to stand on its own.”

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Anon19741541d ago

I think this article kinda misses the point. I'll start by saying again, I have no desire to see the Xbox leave Microsoft. I think that moves is bad for gamers overall though the company on it's own would most likely be fine.

This article presumes that the only reason to spin off the Xbox into it's own company is for a share buyback. That's not the only thing at work here. Members on the board, shareholders and Valueact (who as of Friday sound assured their board seat now) have expressed the opinion before that Microsoft needs to get out of devices altogether. Even though the XBox is profitable now, it's still nowhere near as profitable as MS's other divisions, and that's the point. It's not unlike the moves we saw from IBM in the 1990's to focus and save the company.

It's not just about cashing in to bring more value to the stock, it's about circling the wagons and focusing on what brings Microsoft the biggest returns on their investment capital, and then going from there.

corvusmd1541d ago

I agree that most people don't really get what is going on here (at least not on a gamer site like this), it just appears on it's face to be bad news for Xbox so certain fanboys are trying to cash in. As a fan of Xbox, I actually feel that this could be a great move for Xbox...it would allow more freedom, and ideas for Xbox couldn't get shot down by MS heads that know nothing about gaming. This exact same thing was suggested for Sony a few years back....it would be great and allow for more creative freedom.

iamnsuperman1541d ago (Edited 1541d ago )

There are issues being spun off (I do agree with you by the way). If it is sold to someone else then it is that other companies heads which will be deciding stuff (so lets hope it is someone good and knows something about the game industry) or if it is left to stand on its own it would mean they don't have the pool of money, they have at Microsoft, to invest in new ideas and push the console (similar reason why the playstation brand wasn't spun off)

JokesOnYou1541d ago (Edited 1541d ago )

No darkride like I said when this Valueact first surfaced, it always seemed more like some tiny minority trying to make a quick buck with the spin off or whatever you want to call it, he also talked about microsoft not foing it besides just the money, it also goes against their overall windows plans...I know you had your heart set on that but this article is spot on:

"So the financial upside of the deal isn’t large enough for Microsoft to particularly care, especially given its ample — if mostly foreign — cash reserves. And the exit of Xbox would tear at the fabric of its company-wide plan to unite all screens under the Windows flag."

-Heres the latest financial report:

"EDD revenue increased, primarily due to higher Xbox 360 platform and Windows Phone revenue. Xbox 360 platform revenue increased $641 million or 55%, while cost of revenue increased $275 million or 23%, due mainly to increased royalties on Xbox LIVE content and video games."
http://www.vg247.com/2013/0...

Anon19741541d ago

The calls for Microsoft to spin off the Xbox division and back away from devices started long before Valueact even became involved in Microsoft. The EDD division, even when profitable pales in comparison to the return of capital the rest of Microsoft sees. You keep ignoring this point, I'm assuming because you can't dispute this fact.

And it just makes me shake my head that you continue to dismiss the substantial impact ValueAct could potentially have on the company. It's now all but assured they have a spot on the board. If they have no influence, why are so many pointing directly at them as responsible for Ballmer's early exit, and why are they getting a board seat? Of course they're influential, and they're just adding their voice to those who have long called for Microsoft to focus on their core business and move out of devices.

You're quote from Microsoft's EDD division only proves that now is the best time to get rid of it, while it's still growing, in hopes to capture that value. But again, you keep ignoring the main fact. EDD's return on capital invested is the problem here. If you have two divisions eating up a million a year, and one is making 8% return and the other 40%, are you going to continue investing the poorer return indefinitely? Of course not.

I don't know why you keep pretending that this isn't the case. If it wasn't the case, we wouldn't even be having this conversation.

iamnsuperman1541d ago (Edited 1541d ago )

@JokesOnYou

You financial quote really shows why it should be spun off. Revenue is up by half a billion (total income without the cost included) while the cost of revenue is up by a quarter of a billion. That growth is hardly anything for a big cooperation like Microsoft. It shows Microsoft isn't really making a lot of money off of it or really growing it. It is simple investment technique. If you are paying a lot for relatively small profits you wouldn't keep investing if it draws money away from potentially more lucrative investment. Brand loyalties aside that is what is going on here.

+ Show (1) more replyLast reply 1541d ago
P0werVR1541d ago (Edited 1541d ago )

@darkrid66

This is about the most logical articles about this piece that I've come across so far, and states very relevant points.

So if anything it seems as if you missed the point here buddy. And it's a ridiculous point to compare this to IBM who struggled because the corporate ladder were a bunch of "dinosaurs" allergic to change.

He simply states a very valid point that a spin off of the Xbox Division will only have a short term benefit for the company as whole compared to the investors true "intentions", which is only ValueAct.

What you happen to miss was proof of Microsoft being a very dynamic company, always adapting to the times and as a result have always been successful. They are seeing the decline of general PC useage and why they're adapting with "Windows Shared Core" (also coming to Xbox One). That is why They are coming strong into phones, tablets and most of all entertainment device (Xbox One).

So that proves your shallow comparison of IBM and why Microsoft is making the right moves.

JokesOnYou1541d ago

P0werVR, Well said. I tried to tell darkride from the start that he was jumping the gun with these investor assumptions but the guy doesn't listen actually he's been grasping at straws for years posting anything that he can to imply xbox financial doom.

Anon19741540d ago

Good comment, P0werVR. It's nice to see a reply that actually tries to stick to the matter being discussed without resorting to personal attacks to try to make a point. You know you don't have an argument when...

The IBM comparison actually wasn't mine, I see a number of financial commentators drawing comparisons to Microsoft's current situation and the turnaround IBM orchestrated in the 1990's, I simply agree with based on what I've seen during Microsoft's so called "lost decade" under Ballmer.

Personally, I think you're missing the point. You say Microsoft is a dynamic company and their focus on devices is keeping them relevant, but the truth of the matter is that the devices are proving barely profitable at all despite the billions being poured in. How long can a company, even Microsoft, keep their shareholders happy when they're spending billions on a paltry returns (by Microsoft standards) when the the rest of the company is seeing returns of 30-40% on the capital invested. And we're not talking the XBox here, but devices in general.

Awhile back, Caris and Co, and equity research firm, summed up the situation by referring to the EDD division as vampire responsible for siphoning off billions that could be put to good use for minimal gains. They recommended back then that the entire division needed to be "staked."

That's the problem here. You can say the devices make Microsoft "dynamic" but isn't it about returns? How many billions has been lost by the division? Even now that the division is profitable, the returns still seem minuscule compared to what other divisions are managing.

What Valueact and other shareholders want is for the company to focus on what's making it money. That's not so dramatic a prospect. They look at how wildly successful and focused a company like Apple is with only 5 product lines and they ask "Why aren't we doing that." Microsoft's devices still don't stack up against Apple or Google, so what are they even doing? Some think Microsoft should focus only on corporate software and services where they already lead and lock that market down. Again, like IBM identified where they could dominate in the 90's, honed in and saved themselves rather then letting the bloat of having fingers in every pie destroy them.

I hope the Xbox stays under MS's wing, but the times are a'changing.

Silver3601541d ago (Edited 1541d ago )

What brings them the biggest return on their investment is a short term proposition. If they do not pursue a windows on every screen strategy windows will become obsolete. Look at how they struggle to gain market share in the mobile phone area. After a two year gap when Iphone came out MS dropped to less than 3% market share. With the strategy proposed they would stop selling all devices and limit windows to PC's. It will lead to the eventual end of the company as a major software producer. Google and Apple will gladly step in and push them out of people's conscious as a quality brand. Grow or die.

Anon19741540d ago (Edited 1540d ago )

What brings them biggest returns on investment is software and services, not devices, and while the market for Windows may be shrinking, the software market isn't going anywhere, it's just changing.

Microsoft has been reactionary to other products like smartphones and tablets and that's cost them. They're in a position now where they have a presence in those areas but Google, Samsung and Apple have far superior products and aren't going anywhere. What some are saying is Microsoft needs to fight a battle they can win, and that's looking more and more like corporate software and services. They're already leaders in the field, their returns are extraordinary and the market certainly isn't set to shrink. They need to lock it down, and having your fingers in every pie out there isn't helping. It's what nearly crippled IBM in the 90's, it's why Apple only has 5 product lines.

Valueact is simply lending their voices to the chorus that have been calling for Microsoft to stop spending billions on fights they can't win for years. Microsoft needs to grow, but they need to choose where to grow and target those specific areas. Simply growing out in all directions isn't the answer. Most shareholders believe devices are a distraction for what has and always will be a a software and services company.

Obvious1541d ago

What would happen if Sony buys the Xbox division o_0

iamnsuperman1541d ago

They probably wouldn't. It would cost a lot of money just for them to kill it (which is what they would do) whilst taking some ips and studios (they could combine with Nintendo to kill it and split the ips but a whole host of issues occurs when you do that).

1541d ago
corvusmd1541d ago

That'd be horrible, no competition, and Sony would pretty much have a monopoly...not good news for gamers.

gamertk4211541d ago

You can't buy a Lamborghini when you have ford focus money.

Africa-Garvey1541d ago

Microsoft should LEAVE, and behold the 9th generation come 2020 be a fight for the
BIG 2

FrigidDARKNESS1541d ago

Well this ends all those silly rumours.

Hicken1541d ago

How does an opinion article on speculation end rumors?

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