Microsoft Hits a Home Run

In this video, Fool.com analyst Eric Bleeker looks at Microsoft's (Nasdaq: MSFT  ) new Kinect motion controller. Just weeks into its release, Kinect is already proving to be a hit. This week, Microsoft announced that it had sold 1 million Kinects in just 10 days. Thanks to initial demand, the company upped its sales expectations from 3 million units in 2010 to more than 5 million.

That's a tremendous success story, because selling add-on hardware like Kinect is a challenging field. As has been seen by past failures in the industry (cough … Super Scope), market acceptance has been hampered by poor hardware and poor games. Because they're selling to a smaller market of buyers, game developers often ship rushed games with smaller budgets. Alternatively, because of poor game selection, consumers don't pick up the add-on hardware, creating a situation in which devices such as Kinect are doomed to fail.

However, in the case of Kinect, Microsoft offered a product sufficiently unique enough to spur high levels of interest. Unlike Sony's (NYSE: SNE  ) Move, which looks like a derivative of the Wii's controller, Kinect's motion-sensing technology appealed as a true advancement in a video-game field that's fighting against declining sales as cheaper alternatives on Apple's (Nasdaq: AAPL  ) App Store and Google's (Nasdaq: GOOG  ) Android Market increasingly suck up customers' time and gaming spending. 

Best of all for the company, Kinect gives Microsoft a jolt in a fairly mature phase of this console cycle. The original Xbox was on the market for only four years, but the Xbox 360 is now entering its fifth Christmas season. That'd normally mean rapidly slowing sales, but Kinect should key a strong holiday season for Microsoft.

Finally, Kinect also positions Microsoft well for the next wave of consoles. If it can propel Xbox sales forward through the later stages of this cycle, that should give Microsoft momentum when the third generation of the Xbox gets ready to launch. That's important, because while sales of video-game software might be sagging, the potential of game systems as the center of home entertainment only grows. As seen by Google's aggressive Google TV launch and Apple's refresh of Apple TV, the big players in technology understand the value of extending their reach in to the living room. This generation's inclusion of the Netflix (Nasdaq: NFLX  ) streaming service is just a preview of how consoles can offer media and become the center of home entertainment.

Advertisers drool at the engagement level of smartphone users with their apps, but that's nothing compared with the engagement Microsoft sees with its Xbox Live users. The average Xbox Live user spends 40 hours a month in the platform, dwarfing reports of iPhone users spending 30 minutes a day engaged with apps. As the next generation of systems rolls out, companies should be able to find more ways to profit from the consoles through advertising and selling digital entertainment. Simply put, while software companies such as Activision Blizzard (Nasdaq: ATVI  ) and Electronic Arts (Nasdaq: ERTS  ) continue facing a difficult selling environment, they're unlocking new revenue streams for manufacturers such as Microsoft.

Eric says it's time to give Microsoft's much-maligned efforts at selling to consumers some credit. Kinect's a hit, and it should propel Microsoft into the pole position in the video-game industry.

If you haven't had a chance yet, be sure to read this article detailing how one Fool missed out on more than $100,000 in gains through wrong-headed selling of one of the digital-media giants listed above. And check out more from Fool TV.

Want to read more about Microsoft? Add it to My Watchlist, which will find all of our Foolish analysis on this stock.

Eric Bleeker owns shares of no companies listed above. Google is a Motley Fool Rule Breakers selection. Apple, Activision Blizzard, and Netflix are Motley Fool Stock Advisor recommendations. The Fool owns shares of Activision Blizzard and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 20, 2010, at 7:06 PM, TMFRhino wrote:

    As always with Microsoft, its valuation is going to be dominated by Office/Windows, and the server division to a lessened extent.

    However, consider that as Xbox succeeds it'll prop up the entertainment division, and if it does become a general home entertainment unit in addition to a gaming system, that creates a unique situation for Microsoft to feature Bing in the middle of the living room. From there, Microsoft could have a better opportunity to spin off its online and entertainment division together, in a move that could unlock shareholder value.

    Don't be so quick to poo poo the Xbox. Yes, it could be a minor contributor, but it's also a great "call option" on some opportunities that could yield meaningful returns, even for a company like Microsoft.

    Anyway, my .02.

    Best,

    Eric (TMFRhino)

  • Report this Comment On November 20, 2010, at 8:18 PM, pogicraft wrote:

    The xbox accounts for less than 5% of microsoft earnings, not to say it's not successful, but it's just a huge company

  • Report this Comment On November 20, 2010, at 8:28 PM, TMFRhino wrote:

    Well first, the entertainment division accounts for less than 5% of Microsoft's operating income. That also includes failed developments in Mobile and other anchors like Zune. So, while I'm sure its still in the single digits, it's greater than 5%. The Entertainment division has a lot of random stuff with little revenue and high expense burn buried in it.

    Second, I won't do the same repeat, but a big part of the Xbox story is the ability to unlock value through 1.) The potential for a future spin-off or 2.) An valuable entry into the lucrative home entertainment market, and a Trojan Horse for Bing (if done right).

    Does the Xbox matter 10% as much as being able to accurately model out Windows/Office's progress over the next half decade? Probably not. If you want to "play" the Kinect story, you're better off buying Marvell who makes the processor in it. However, its a "call option" with a lower possibility of a high pay off, investors should take note, jaded as you all appear to be :).

    Best,

    Eric Bleeker

  • Report this Comment On November 22, 2010, at 1:49 PM, mpmoore58 wrote:

    Kinect does not represent any invocation by Microsoft either.

    The company behind the Kinect technology is PrimeSense (Not sure that Marvel is involved). http://www.primesense.com

  • Report this Comment On November 22, 2010, at 4:04 PM, TMFRhino wrote:

    MPMoore58,

    http://www.eetimes.com/electronics-news/4210757/Teardown--Ki...

    There's a teardown that talks about Marvell's processor.

    Best,

    Eric

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