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Spin off the Xbox? Not so fast.

Now that Microsoft officially has a new chief executive, there's a lot of speculation about the future of the company and, in particular, the future of the Xbox.

Top investors in the company have called, loudly, for Nadella to sharpen Microsoft's focus by slicing off the Xbox division. One thing is pretty clear: If the Xbox did spin loose from the mothership, it would not be good for the Xbox. Without Microsoft the Xbox is valuable as a brand, but less so as an actual service.

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washingtonpost.com
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Anon19741347d ago (Edited 1347d ago )

Given the growing discussion regarding a potential Xbox spinoff, I'm really surprised we're not seeing more of these articles appearing on N4G. Certainly an Xbox spinoff would be the biggest gaming news in decades and would have the potential to fundamentally alter the industry landscape, and yet on N4G...the matter isn't even being discussed. I'm sure there was once time when it seemed inconceivable that Atari or Sega would exit the hardware business, and although there's huge differences between their situations and Microsoft's, the ultimate outcome was still the same...the exit from the home console market.

While Sony is in worse financial shape, we don't see the prospect of a Playstation spinoff being seriously discussed (it crops up rarely) compared to an Xbox spinoff which has been popping up over and over and over again. There's a helluva lot of smoke if there's no fire.

Certainly when you have Microsoft board members like ValueAct and Executive VP's like Stephen Elop calling the Xbox "non-essential" to Microsoft's strategy, and you know they're just adding their voices to others who thought the same thing but were always shut down by Ballmer..there's a real potential to see a fundamental shift in the home video console landscape on the horizon. Microsoft isn't hard up for cash, but the company that doesn't change with the times risks losing everything. Just ask IBM or Apple about how close they came to oblivion.

Like this opinion piece from the Washington Post, this is a discussion gamers interested in the industry should be having as the calls for an Xbox spinoff from Microsoft's investors become louder and louder. I saw one commentator mention that unlike other MS products such as Windows, the Xbox is a standout product in MS's stable because people want to own one, they aren't forced to have it.

BG115791347d ago

Bubble up for interesting.

The last paragraph sums up what every investors is actually thinking.

Rig_Master1347d ago (Edited 1347d ago )

Except it isn't going to be spun off.

The Xbox is not a viable product without Microsoft's monopoly cash streams keeping it alive. It will be shut down.

It's been 14 years since Microsoft made the mistake of thinking they could compete in the console market. They are 0-3 over those 14 years.

The first Xbox just avoided coming in last place in worldwide sales due to Nintendo bailing out on the GameCube a bit earlier than Microsoft did with the Xbox.

The Xbox 360 ended up in last place despite being rushed out the door a year early, being 200 dollars cheaper than the PS3, and the RRoD inflating sales by tens of millions due to 360 owners buying new model after new model in hopes to finally own a console that worked properly.

And the Xbox One is getting crushed in sales by the PS4.

It's time to throw in the towel and move on. Microsoft is sitting by and letting the home PC market wither and die while wasting time losing in the console market. PC gaming is one of the pillars that made Microsoft what it is today. They need to drop the Xbox fiasco and return their focus to PC gaming.

Anon19741347d ago (Edited 1347d ago )

I think there's a couple of points this article has wrong. It mentions Microsoft's Xbox Software developers as being part of this, but there's no reason that a spinoff of the Xbox brand would necessitate getting rid of their developers. If anything, for years investors and analysts both have been saying Microsoft should ditch the hardware business and instead focus on software for the Xbox, as software is a much more lucrative business and one that Microsoft is obviously more familiar with. There's no reason why MS couldn't spin off the Xbox and still make games. They were doing it before the Xbox even existed.

The other point was the "success" of the Xbox console. We wouldn't even be having this conversation if the Xbox hardware business was such a huge success. The reality is that the Xbox console's sales success has come at a huge financial cost to Microsoft. It was just in November that analysts revealed that the Xbox was costing Microsoft 2 billion annually. This author has either missed or chosen to ignore this point but if there wasn't some truth to this, why does the spinoff talk refuse to die? I was sounding warning bells regarding the long term future of the 360 back when sales started to slip but MS hit it out of the park with Kinect, reinvigorating sales. The problem is it didn't last, and Kinect 2 isn't as big a system seller as the original Kinect proved to be.

And you have to wonder what the Xbox One is costing them at the moment while it lags behind in sales. Certainly as a gamer I appreciate the competition the Xbox brings to the table, but that's not going to change the conversations going on in the MS boardroom regarding the Xbox's fate.

http://www.gamesindustry.bi...

curtis921347d ago (Edited 1347d ago )

"Xbox is a standout product in MS's stable because people want to own one, they aren't forced to have it."

I beg to differ. Whereas sony focuses on trying to get players to want a PS4, MS has and always will focus on forcing people to get an xbox instead. Mainly through exclusive deals to get content first or by the ridiculous contracts they make... look at [email protected] stuff for example. Look at how everything is behind the Live Gold paywall. They're all about forcing consumers to do what they (MS) sees fit. Just like they tried with DRM. Because if they give us choice, they know we'd go elsewhere. Why else do they write checks left and right for exclusive content rather than developing their own games? Buying Titanfall is a prime example.

KingDadXVI1346d ago

The main issue that everyone seems to miss is that the Xbox Division makes money for MS. Is it in the black yet when you account for all of the investment dating back to the original Xbox? No, but it does make money now and has for years. In fact the Xbox will be in the black within 2 years at current earnings.

The Xbox has also become the flagship of the devices division. It is there spearhead for pushing further into the consumer realm. The reality is that MS knows that the home PC market is shrinking and that they cannot continue to rely on it yet they don't want to lose those households. The way to maintain and keep market share in those households is to move their software and services onto all the relevant platforms that the consumer market wants.

Their strategy for doing this is to make all of their devices work within one ecosystem including the Xbox. It is the only MS consumer brand right now that has ubiquitous recognition. That is something that has been very hard for MS to come by. The only other things that they are recognized for are Windows and their Office programs.

By leveraging the popularity and brand recognition that the Xbox has they intend to get you to buy into their other services and devices. Why? Because they all work together seamlessly. Just wait until you see the announcements they have planned for next year on this subject. It is a part of project threshold and the Xbox is a big part of that.

Bill Gates, Balmer and several others at MS have developed this strategy and the board has signed off on it. It will be Nadella's job to implement that plan not change it. Also don't forget that Bill and Ballmer are still members of the board and Bill is also taking a direct hand in direction of the devices and services division.

Also people don't seem to realize that their are always noisy investors. Sony has their own and one is Daniel Loeb who wants to do drastic things to Sony.

Investors like ValueAct are only interested in the spike in stock that a sale of the Xbox would create allowing them to sell off stock at a higher price and making a quick buck. They have no interest in MS products. They could make orange juice for all they care. ValueAct does not have representation on the board nor the stock to influence the vote. Bill Gates and Ballmer however do. About 15 times more stock.

This speculation is exactly that speculation. It sells papers, magazines, and gets websites hits but it is baseless and more would damage MS not help them adapt to the new growing markets.

Anon19741346d ago (Edited 1346d ago )

That's not the main issue though, which is why it's overlooked. It has nothing to do with the Xbox division making money (although it's been suggested as recently as Nov that the Xbox actually loses 2 billion for Microsoft annually) and everything to do with return on capital.

It's as simple as this. If you have 10 divisions and you invest a million into each, nine divisions return consistently 20%, the 10th division 5%, you start to wonder why you don't put all your investment into more profitable ventures.

That's what's going on here. Valueact, who own billions in MS stock are fully aware the Xbox division makes money. No one is missing this fact. You think they don't know? You think the board members or VP's in favor of spinning off the Xbox don't know the division makes money? The fact is other divisions generate far, far greater returns for the money invested. And if you think Valueact is just a "noisy investor", you haven't been paying attention. "Noisy investors" don't get seats on the board that's limited to just a handful. And it's not just Valueact who consider the Xbox "non-essential" to Microsoft's greater strategy.

So worse case scenario the Xbox is losing the company billions annually. Best case it lost for a decade and now makes money, barely, but still those returns pale compared to the return on capital the rest of the company enjoys. The Xbox was Ballmer's baby but now that he's gone, how long can you honestly see Microsoft supporting such an obviously under-performing element of their company?

Financial analysts at Caris and Co once commented that the entire division was a "vampire" on the rest of the company sucking away capital that could go towards better performing divisions. They claimed the Xbox division needed to be "staked".

This talk has been going on for years and is only getting louder. Now it's also coming from inside the company and from the top levels of the board. That's not to be dismissed, and don't for a second think that Xbox One's initial performance relative to the PS4 hasn't been noted as well.

lifeisgamesok1347d ago

Xbox isn't going anywhere

Xbox for life!

Kingthrash3601347d ago

i said the same about sega.

i hope we dont lose xbox but anythings possible.

Bdub20001347d ago

Investors care about the bottom line. If X1 is profitable and projections continue to be met, no board in their right mind would vote it off. One or two investors stomping their feet makes me roll my eyes, that isn't news, that is every board at every major company. Theres a new CEO, and they are making sure their voice is heard.

Anon19741347d ago

This is oversimplified. It's not just about the bottom line, it's about the return on investment. If one division is returning 20% on the capital invested and another is returning 5%, the fact that they're both making money is irrelevant. The question then becomes "Why are we investing capital in this division when the returns are so much greater in this other division."

That's exactly what's going on inside of Microsoft. For years, the EDD division of Microsoft wasn't making anything, and then even when it did turn a profit, it just didn't compare to the performance of other divisions. Ballmer was effectively the only reason the Xbox wasn't ditched quite some time ago as there's always been pressure to take that capital and reinvest in divisions with better performance. Ballmer's gone now.

And one or two "investors" stomping their feet isn't what's going on here. If it was we wouldn't hear anything about it. This has been an ongoing issue for some time and members of the board want that money reinvested elsewhere. Valueact alone controls billions in MS stock, and has one of the few seats on the board because of it. If you don't think their voice carries a lot of weight without Microsoft, you haven't been paying attention. The fact that they have a board seat now speaks volumes.

KingDadXVI1346d ago (Edited 1346d ago )

"This talk has been going on for years and is only getting louder. Now it's also coming from inside the company and from the top levels of the board. That's not to be dismissed, and don't for a second think that Xbox One's initial performance relative to the PS4 hasn't been noted as well."

Yes, you are correct it has been going on for years. Basically since the Xbox division was created. Which is another reason that it is very unlikely to happen.

They have a board seat because it shut them up. You will notice that there has not been a peep out of them since. Bill Gates and Ballmer alone own more of the company than ValueAct does. A considerable amount more. If you think that their opinion does not carry weight in MS you are mistaken. The possibility of a proxy fight has been removed which is what MS wanted so that they could continue with their strategy of diversifying into one of the only growing sectors in tech.

PCs are waning and business sales are going to stagnate as well in the mid to long term. MS knows that they need to move into the lucrative consumer market and have wanted to do so for years. It would be incredulous for them to dump the one division that has brand recognition for them in that sector. The console itself is little more than a means to an end but they need that means desperately if they want to be relevant when going up against the likes of Apple and Google.

As far as people in the company taking notice of the Xbox performance compared to the PS4 goes you are no doubt correct. But what they are doing about it is where you are mistaken. I have worked in senior management for a public company with a market cap of close to $100 Billion for years and I know exactly how those situations are treated.

They number one take stock and see what the damage is. They find that the console is selling beyond projections but not doing as well as the competitor due to poor management, planning and PR. The way that this is handled is to remove the personnel responsible, replace them with more capable people and run damage control. The last thing you do with a mistake like this is dump a profitable division that is also your one popular example of how well you can do in a market you are desperately trying to expand into.

This has been very evident in the bold and confident move the likes of Phil Spencer and others have been making and to all intents and purposes succeeding at.

If you think that MS does not want very badly to be in the market position that Apple and Google are in with consumers you are very mistaken. They have made it very clear that Xbox is the spear point of their thrust into that market.

You will not see them sell of the that division I will guarantee it. But you are certainly welcome to your opinion. I look forward to discussing this issue again in 10 years time as I am sure it will still be the rumour floating around.

ThePope1346d ago (Edited 1346d ago )

It's also important to remember if a spin off was going to happen it would have happened before launch as a spin off now could cause confusion with consumers stalling sales.

That said, in the past spin offs of companies like American Express spinning off its investment arm has created a more investment focus, and a more profitable company in Ameriprise. So I see both sides.

But King is right Microsoft needs Xbox to stay relevant. Their enterprise business continues to shine, but let's not kid ourselves, servers have little sex appeal lol.

Anon19741346d ago (Edited 1346d ago )

@KingDadXVI but while this talk has continued for years and not gone anywhere..the reason was Ballmer, plain and simple. The Xbox was his baby but Ballmer's gone now.

As for ValueAct being "shutup", they have their board seat so they can now enact the changes they want from inside the company. They don't need to raise a public stink or to threaten proxy wars with shareholders because now they're in a position to get done what they want done. That's the reason you aren't hearing from them anymore. Because they won.

And you forget, Valueact wasn't alone inside Microsoft in expressing the opinion that Xbox money should be diverted elsewhere. Ballmer and Gates might own plenty of company stock, but what on earth makes you think they would block the board's strategic product decisions pertaining to specific brands, especially in a case when they're obviously not performing in line compared to the rest of the company?

Brand recognition for the Xbox doesn't suddenly mean the division is going to start pumping out 20% return on capital invested. Again, you're not addressing this point. The division is underperforming compared to the rest of the company. This isn't a secret. You can't honestly believe an underperforming segment can continue to go on underperforming indefinitely with no consequences? Over the years we've seen Microsoft take many products out behind the woodshed that haven't been able to turn around.

Also remember, the division may be profitable but analysts say it's in spite of the Xbox, not because of it. If this is true and the Xbox is losing them a couple billion annually and they're hiding those figures with Android revenue, why on earth would they continue to support it now that Ballmer's isn't there to hoist it up on a pedestal?

"If we start with the overall traditional [Entertainment and Devices Division] business that actually loses money before corporate allocations and back out the nearly $2 billion 95 percent gross margin Android phone royalties, we conclude that Xbox platform plus Windows phone and Skype lose about $2.5 billion per year, and we estimate that the Xbox platform may account for roughly $2 billion of this," Sherlund said."

"Unable to make a profit [from entertainment]," says Hartung, "it will increasingly be seen as a distraction to the battle for saving Windows - and Microsoft leadership has long shown they have no idea how to profitably grow this business unit." Hartung expects Xbox to be sold off.

Now that Ballmer's gone, I think it's not a matter of if the Xbox will be sold off, but when. They probably would have been spun off years ago when sales started to sharply drop off, but then Kinect boost bought them some time. Times are different now and MS is heading in new directions.