Should Microsoft Lose Xbox 360 Division?

Should Microsoft Lose Xbox 360 Division?

When a financial services firm as massive as Goldman Sachs strings together the words “Micorosft,” “Xbox 360” and “unprofitable,” everybody in the games industry stops and pricks up their ears to listen. That’s what happened recently when the firm advised Microsoft to split off its “unprofitable” consumer entertainment division, which includes everything Xbox, from the rest of Microsoft to make the company more appealing to investors.

As it happens, Goldman Sachs didn’t exactly use the word “unprofitable;” it just made for an attractive and highly viral headline. However, the company did in fact advise that Microsoft split from its Xbox department after the firm downgraded Microsoft share recommendations from “buy” to “neutral.”

According to a report published by TechFlash, Goldman Sachs believes that if the two properties are chained together, they’ll keep one another from achieving true potential. “A break-up of the consumer businesses could potentially unlock hidden value, or more discipline on cost could turn the businesses into contributors to profitability and shareholder value.”

“To date the company’s comments suggest that management still sees significant value in combining the consumer and enterprise efforts,” it said, “but we view a foot in both camps as preventing a successful focus on one strategy, a la Oracle in the enterprise or Apple for consumers.”

Profits are not a problem with the Xbox 360. It took a long time for Microsoft to be able to boast about its prosperity (mending the wounded through the Red Ring of Death plague was a bit of a cost), but as of April 2010, Microsoft’s Entertainment and Devices Division (including the Xbox 360) showed a $165 million profit on revenues of $1.67 billion registered in the third quarter of its 2010 fiscal year. Profits do fluctuate depending on whether or not a big release comes by in a quarter (for instance, a Halo game), but the Xbox 360 is generally healthy.

So why separate it from the Microsoft brand?

Because Microsoft is having some minor problems elsewhere. The frenzy over tablets and slower demand for PCs caused Goldman Sachs to lower its earning estimates for Microsoft by 4 percent. Sachs’ Sarah Friar believes the Xbox brand might be strong enough to stand on its own. Meaning, “the business could show unlocked value with forced cost discipline compared to as a piece of Microsoft.”

Goldman Sachs’ advice is, to be gentle, a little nutty. Why fix what’s not broke? Why even recommend it?

That seems to be the sentiment amongst gamers. Granted, corporate finances are a tricky thing to follow, but unless Goldman is holding off on revealing some vital bit of its plan, nothing’s being offered here except “Let’s separate these two brands, sit back, and wait for Xbox to discover its untapped potential,” like some teenage hero in a second-rate anime.

And even the industry’s casual observers have the right of it, according to other professional analysts and investors. Investor Paul Kedrosky compared the idea of separating Xbox from Microsoft to “Microsoft learning Geller-ian magic tricks, the equivalent of being able to bend spoons with its brain.” And Matt Rosoff, an analyst from ComputerWorld has no idea what Microsoft would gain by spinning off the Xbox. “Xbox would lose more than it would gain by going it alone.”

Rosoff also pointed out that there are other cost-cutting measures Microsoft can take to boost its financial outlook. Scrapping Bing, for example, the search engine that few people reach for as an alternative to Google.

But one of the most compelling arguments against splitting off Xbox comes from Laurent Benadiba, the CEO for Smack Down Games. In a GamesIndustry comment thread, Benadiba wondered who would fund the Xbox 360’s experimental hardware, to say nothing of its biggest game launches.

“[L]ook at Kinect or the Halo launch, would an independant (sic) company be able to pull this out, still making the hardware and pushing the software with no other back up than public investors?”

There are lots of good reasons to avoid experimenting with a highly profitable brand, but that one reason might be the most compelling one of all: The sad prospect of a future Halo launch that’s heralded by a smattering of cheap commercials and launch parties featuring balloons and one tired old clown.

About Nadia Oxford
Nadia is a freelance writer living in Toronto. She played her first game at four, decided games were awesome, and has maintained her position since. She writes for 1UP.com, Slide to Play, GamePro and other publications, and is About.com’s Guide to the Nintendo DS.

1 Comments

  1. I’m sure the XBox division could make it as a stand-alone company at this point, but up to the last year I doubt they would’ve made it without Microsoft. What strikes me as interesting how little Microsoft has used synergy between Windows and XBox. They’ve tried with Games for Windows LIVE and more recently with Windows 7 Phone, but it’s never really took off.
    Now however, with rumors buzzing about Apple wanting the Playstation brand for HD console synergy with iOS/GameCenter it would seem like the opposite case – if the mobile gaming market is moving towards integration with HD console profiles Microsoft should hold on tighter to the XBox/LIVE brand than ever before. I don’t know if it’ll actually be a competitive advantage or just an industry fad – I’d say it all depends on how Apple will decide to move in the console market (which they will enter sooner or later).
    If Apple fails then the possibility of XBox breaking off from Microsoft would be more plausible. In that case they are likely to move to a more active publisher role than now, especially if the role of the major 3rd party publishers diminish as we move towards a landscape of digital-only sales.

    Or well, lots of guesswork from me. Keep up the good work Nadia, you’re my favorite games journalist!

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