Will Microsoft Sell Off the Xbox Brand?

It's no secret that Microsoft (NASDAQ: MSFT  ) has faced difficulties with the unveiling and marketing of its upcoming Xbox One console. The foibles surrounding the upcoming hardware have been a frequent subject of media discussion, further complicating the device's future and creating a wave of negative publicity that Microsoft has struggled to combat.

The system's feature set and associated strategic vision look a lot different than they did when the Xbox One was revealed in May. It no longer requires Kinect to function, its CPU has received marginal clock speed upgrades, there is no online connectivity requirement, and used games can be played without any system level restrictions. That said, the image problem still remains, and early reports suggest that Sony's  (NYSE: SNE  ) PlayStation 4 enjoys a significant mindshare and preorder sales lead. Now, in the midst of the One's difficulties, some investors are calling for Microsoft to sell off its gaming division.

Game over?
It's still far too early to label the Xbox One as a failure. That said, the planning and early marketing for the system can certainly be classified as such. There are notable portions of the Microsoft shareholder base who have already begun calling for the company to sell off the Xbox division.

Activist investor firm ValueAct Capital Management holds approximately $2 billion in Microsoft shares and has stated that it would like to see the company dump off the Xbox brand to a willing buyer because it does not produce the kind of profit margins that are created through software offerings like Windows and the Office suite. The hedge fund also called for the firing of CEO Steve Ballmer prior to announcements of his impending exit and an increase in the dividend yield that the company pays out to investors.

It appears that ValueAct has had a profound impact on recent decision-making at Microsoft, and it might play an even bigger role going forward. It was announced in the beginning of September that the hedge fund would have a seat on the board beginning in 2014. It was also recently announced that Microsoft would raise its dividend payouts by 22% and that it would be initiating a $40 billion buyback program. With these changes set to be implemented and the apparent influence of ValueAct, it's looking more likely that Microsoft could choose to seek a buyer for its console gaming division.

Or continue?
ValueAct may have a point when it posits that the returns on the Xbox investment have not been worth the substantial capital that Microsoft has invested. That said, Xbox stands as one of the company's strongest consumer brands.

Microsoft does not have the same brand appeal as an Apple  (NASDAQ: AAPL  ) or Google  (NASDAQ: GOOGL  ) , but has shown a desire to reshape its business model so as to be more in line with these competitors. In fact, many believe that the strategy behind the pre-reversal Xbox One was aimed more at pre-empting potential gains by Apple and Google in the battle for the living room than at besting Sony's PlayStation 4 console. Microsoft has expended a substantial amount of time and resources since entering the gaming fray. The Xbox brand is still strong, it just hasn't been managed effectively as of late.

Battle for the living room
Even though Sony's PlayStation 4 looks to be the early sales favorite, there is still time and incentive for Microsoft to right the Xbox ship. The fact that the two consoles use very similar hardware architecture means that the system is sure to receive third party support throughout its lifetime even though the PS4 has a distinct power advantage. As such, there is very little chance that Microsoft will choose to ditch Xbox anytime within the next five years.

If Microsoft were to ship an Xbox One SKU without Kinect, it would be able to achieve price parity with the PlayStation 4 relatively early in its lifecycle. The negative reactions to the reveal of the Xbox One and the comparative excitement that seems to surround the PS4 forced Microsoft to acknowledge Sony as its primary competitor in the space.

Still, Mr. Softy is undoubtedly eyeing the long-term game where Apple and Google look to be dominating forces. AppleTV and Google TV have yet to really take off, but the respective tech giants behind these devices have telegraphed intentions to dominate the living room.

Long-term game
Interestingly enough, the Xbox line was created by Microsoft to ensure that Sony did not gain control of the home entertainment space with its consoles. Now, there are other and bigger threats to worry about. The Xbox brand could be vital if Microsoft hopes to continue competing in the home entertainment space.

What's more, the company may face difficulties finding a buyer if it chooses to abandon the Xbox brand. There are not many companies who are equipped to launch and maintain mass-market gaming hardware and services.

For these reasons, you can expect Microsoft and Xbox to stick together, even if there are bumps along the road. 


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  • Report this Comment On September 21, 2013, at 1:51 PM, don1941t wrote:

    This must be the dumbest article I've ever seen on TMF about MSFT. It's well known TMF is MSFT-Hostile but the author should at least review some the existing press releases about what Xbox One means. Sure it's still a game console but the real biggie for One is Kinect and voice control of your living room.

    Who has that today? no one.

    Who will have it this year? Only Xbox.

    Who has a living room? ... Oh yeah ... EVERYONE!

    Please do some research before publishing your next article.

    Start here: http://www.xbox.com/en-US/xbox-one/meet-xbox-one

    "you can jump from TV to movies to music to a game in an instant."

  • Report this Comment On September 22, 2013, at 5:31 AM, supersonicsjm wrote:

    Perhaps don1941t you should do a little more research too.

    I think you'll find all this voice control stuff that "only Kinect" can do is also available on the PS4 through its camera. Not that it's a real biggie since no one was bothered about it when the Xbox 360 got it with it's Kinect, also proving your point about no-one having it right now wrong too.

    Kinect will not save Xbox One. Why do you think the majority asked for the requirement for it to be plugged in all the time to be removed? All this stuff about jumping from TV to movies to music to games in an instant, Sony had all that announced for the PS4 months ago and the Vita does that already. It's nothing new and no-one cares about it.

    At the end of the day, the Xbox One is primarily seen as a video games machine, part of the reason there has been such a backlash on it is the lack of decent games. I mean the fact there were almost none at the reveal was just a terrible idea. No one buys a games console to use it as a set-top box, they buy it to play games, so to hype the fact you can use it as an add-on to your PVR over the games that were currently in development was ridiculous. Nobody needs an overlay for their PVR's, all that functionality is already available in their PVR's, it's highly doubtful anybody will use their Xbox One to control any of their PVR's functionality.

    But hey, clearly more research should be done by the author. Clearly he hasn't taken into account the public reaction to the product and the effect it has on the company.

  • Report this Comment On September 23, 2013, at 11:32 AM, BlunderBusDriver wrote:

    The Article sucks I agree. Supersonicsjm, for some of your comments let me clarify:

    Voice Control

    Sony has reviewed very little about its camera and voice control. We know that on Kinect 1 for 360 this was available and seriously used. Sony never had voice control to the point where it became a big deal. It was never used (vs. what MS did) and it seems to exist just as a "me too" option for verbal sparring matches haha.

    On Kinect II, the microphone can filter out sounds and can tell from who the voice is comming from, so that your roomate, kid sister, husband or wife wont be able to interrupt your game. The Kinect Camera is 1080p also. Having the first Kinect, if you are unbiased I suggest you try it out first to see its potential.

    Xbox One as a Video Games Machine

    You are right, this is primarily used as a games machine because no one in this market has ever had another option from games companies. Microsoft is trying to re-define what these boxes can do with its HDMI input, voice control ("Watch HBO") and still having a hardcore game box. It is up to Microsoft to make sure this thing works and then let the market decide if it likes this sort of thing.

    The big issue with Xbox One (IMO)

    In my oppinnion the problem here is that, like Sony, MS refused to take a loss per console. They are going to break even or "low margin at worst" (http://www.forbes.com/sites/insertcoin/2013/09/06/at-500-mic...

    While sony is making an actual profit of $25 per console, althou recent reports say it might actually be a small loss.

    Many wonder whether or not Xbox one is really hardcore, since the Sony console has:

    - Better RAM

    - Better GPU

    MS should have gone for a loss of $50 or $100 per console, kept the price where it is, and put that extra budget directly into gamine hardware.

    The issue is exactly as you say it supersonicsjm, in that Xbox is viewed as a games console. Therefore, MS should not has accepted the risk that their console would be

    - More Expensive

    - Less Powerful

    Even though it does more than the PS4, the primary metrics that gamers see is system hardware. The PS4 does nothing new in terms of user input, the PS4 delivers exactly what gamers would expect - top of the line tech. MS needed to match or beat this in their console and included the camera at little or no extra cost to the consumer.

    - MS has the money for this.

    - If gamers don't accept MS hardware, then eveything MS is tryihng to push with the rest of the console will not get incorporated.

    - You can't update hardware mid-cycle - i.e. they can't add more ram into the console next year, or they can't add a second GPU to beat Sony, because previous consoles will then not be able to play newer games.

    - Sony CAN copy MS's HDMI input mid-cycle, because that does not affect how previous owners will play newer games.

    I don't understand - when these consoles last 6 - 10 years, why MS couldn't have put in another $50 to $100 per console in budget and just taken the loss - to encourage acceptance by the market. This way people would see 2 consoles equally powered, with MS costing $100 more while offering so much more.

    Currently its seen as 2 consoles, Sony is the conservative console that offers more of the same (which is not a bad thing), while MS wants us to pay $100 more for a slightly weaker console that does so much more.

    Its had for many to justify the extra $100 this way. Whatever committee at MS decided that it was just fine to sell the system at-cost - knowing that half the cost was the camera - seriously needs to be looked at.

    The Xbox One is the future of all gaming consoles - though it doesn't mean that MS will capitalize on it - because they refused to take the financial risk in sales for the console.

    You can't even play this thing standing on its side! WTF MS, you can do better than this!!!!!!!!!

  • Report this Comment On September 23, 2013, at 11:34 AM, BlunderBusDriver wrote:

    Sorry for all my typos!!!!

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