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If Microsoft Does This to the Xbox, Both Gamers and Investors Will Lose

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If Stephen Elop becomes Microsoft's (NASDAQ: MSFT  ) next CEO, the company could sell its Xbox division, according to Bloomberg. Reuters reports that Elop is one of five final candidates Microsoft is considering to succeed Steve Ballmer, making an Xbox spinoff possible, perhaps even likely.

But it would be an unmitigated disaster -- both for Microsoft and for the Xbox itself. If Microsoft is going to remain a relevant consumer company, it will need the Xbox, as rivals, including Apple (NASDAQ: AAPL  ) , prepare to assault the living room. At the same time, the Xbox itself -- separated from Microsoft -- would be at a huge disadvantage; Nintendo's (NASDAQOTH: NTDOY  ) ongoing collapse demonstrates how difficult it is for a console maker to survive as a stand-alone company.

Why would Microsoft want to get rid of the Xbox?
It isn't that Xbox is a failure -- Microsoft's Entertainment and Devices Division (largely composed of the Xbox) has mostly been profitable since 2008. But compared to Microsoft's other divisions, it's hardly noteworthy. In fiscal year 2012, for example, it brought in just $364 million -- less than 2% of Microsoft's total earnings (I use 2012 here because in 2013 the division was expanded to include Microsoft's Surface tablets).

Splitting off the Xbox could allow Microsoft to focus on core products like Office and Windows. Over the past 10 years, Microsoft shares have underperformed the broader market -- the company's mammoth size many have kept management unfocused and limited Microsoft's upside.

Vulcan Capital, Paul Allen's investment firm, has argued for an Xbox spinoff. Allen no longer has any management role at Microsoft, but as a co-founder, his word might have some weight. Likewise, some Wall Street analysts, including those at Nomura, have written about the potential benefits to an Xbox spinoff.

The war for the living room
But if Microsoft wants to remain relevant in the consumer tech space, it will need the Xbox. Hardcore gamers have criticized Microsoft's decision to include so many entertainment features in its upcoming Xbox One, but those features (like the ability to make Skype calls, control a cable box with voice commands, and get live fantasy football updates) make the Xbox One as much of a smart TV as a video game console.

Apple has reportedly had its own smart TV in the works for years, a persistent rumor that's been supported by public comments from Steve Jobs and CEO Tim Cook. An iOS-powered TV could serve as a hub for an Apple household, expanding Apple's ecosystem into the living room.

It could even act as a game console. Nat Brown, a former Microsoft employee and the co-creator the Xbox, wrote back in February that a fully featured Apple TV or set-top box running iOS, could, when paired with a controller and access to Apple's app store, serve as a powerful video game console -- it could even crush the Xbox.

Certainly, if Microsoft's next CEO wants to focus entirely on the enterprise space, then getting rid of the Xbox makes sense. But if Microsoft wants to continue to compete with Apple in the consumer space, why give up the living room just as Apple is about to enter?

Could the Xbox survive as a standalone company?
As a gamer, the Xbox One intrigues me -- although I don't plan to purchase one at launch, I might eventually buy one. But I definitely won't if Microsoft spins the company off. Console businesses need to exist as part of larger consumer electronics companies -- as stand-alone company, the Xbox will be at a huge disadvantage.

Consider Nintendo, unique in the sense that it's the only console maker that's strictly a video game company. Because it doesn't have any other operations to fall back on, Nintendo has been limited in the hardware it can offer -- Microsoft and Sony have been willing to sell their consoles at a loss; Nintendo doesn't have that luxury.

That was fine when it came to the Wii. Nintendo's console was less powerful than Microsoft's competing Xbox 360, but still outsold Microsoft's device. The Wii U, however, has been notably less successful. To boost sales, Nintendo has been forced to cut the Wii U's price, and is now selling the machine at a loss. That's weighed on earnings; Nintendo lost money last quarter.

Moreover, progress is making modern consoles more complex than ever before, requiring the companies that make them to have a better understanding of different technologies. Nintendo's lack of Internet prowess was fine in an era where multiplayer Internet-based gaming wasn't so prevalent; Microsoft, with its PC expertise, is positioned to offer a better online experience -- indeed, Xbox Live has been widely praised as the best online gaming service.

Spinning off the Xbox would be a mistake
If Microsoft's next CEO decides to sell the Xbox business, investors should take it as a sign of incompetent management.

Getting rid of Xbox would be bad for Microsoft and for gamers. As an independent entity, the Xbox would be likely to fail -- with Nintendo struggling, it's becoming ever more apparent that console makers cannot survive as standalone companies. Microsoft's investors, meanwhile, would see little benefit. Any proceeds brought in from the sale would not be worth ceding the living room to Apple.

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Read/Post Comments (18) | Recommend This Article (6)

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 09, 2013, at 3:13 PM, prginww wrote:

    I don't see how it's a disaster if MSFT were to spin off X-box... I'm fine if they do and I'm fine if they don't.

    Meanwhile if Apple enters the living room I doubt it will be with a video game console. They like to make products they can sell for high margins. And they'd have to start at ground zero with video game publishers, and all the exclusive deals Microsoft already has could be quite a barrier.

  • Report this Comment On November 09, 2013, at 3:53 PM, prginww wrote:

    Oh I see how Motley Fool works....In prior months they've run several stories about how they think Microsoft should sell off the Xbox division. Now Motley Fool writes stories about how that would be a disaster.

    I guess credibility or even consistency is not to be expected from Motley Fool

  • Report this Comment On November 09, 2013, at 4:04 PM, prginww wrote:

    It wouldn't be bad for Xbox if it went to Samsung, a huge rival of Sony. maybe they would actually pay attention to it unlike MS.....

  • Report this Comment On November 09, 2013, at 6:49 PM, prginww wrote:

    Hardcore gamers? Hardcore gamers are on PC's and not dumbed down consoles. Just because you play 12 hours a day doesn't make you a hardcore gamer. Its a mentality that wants games difficult and challenging which lack severely in today's games in large because of console's who just want cool graphics and the rest doesn't matter much.

  • Report this Comment On November 09, 2013, at 7:34 PM, prginww wrote:

    You can hate on Microsoft all you wan't to, but if they sell off Xbox I fear for the brand's future. Who the hell else would have the cash to handle what a gaming platform needs to survive?

  • Report this Comment On November 09, 2013, at 8:03 PM, prginww wrote:

    "it brought in just $364 million".

    -Yeah "just" $364 million. And to the "gentleman" who thinks only "hardcore" gamers are on PC, if you think "hardcore" equals "bags that contain vinegar and water", you may be right.

  • Report this Comment On November 09, 2013, at 9:12 PM, prginww wrote:

    Apple could very well take over a huge part of the market in home gaming with a smart tv of their own. They already took over a huge part of the market with phones and tablets that beforehand would seem so unlikely. It having the established brand with people already dedicated with a lot of entertainment on itunes would guarantee them success. I believe its what Apple is doing and the only reason why I see Microsoft selling the Xbox division is to give up and profit from the brand instead of competing directly with Apple.

    The scary thing with Apple is if they release a new version every year. As a gamer, I would hate that if they did so with a smart tv that is as dedicated to gaming as the Xbox One. I would hate to know a new and better one is only a year away.

  • Report this Comment On November 09, 2013, at 9:17 PM, prginww wrote:

    Let's new management to decide for its own future.

    Sell Xbox at premium to Samsung while Microsoft is in good position. I wish I do have enough finance.

  • Report this Comment On November 09, 2013, at 9:50 PM, prginww wrote:

    Ok, I know the Motley LOVES to talk up Apple in 95% of his articles. But as someone who has been playing and following games and consoles most of his life, I can say with 100% certainty that Apple IF they attempt to join the console market would fail so completely and so fully it would go down as one of the biggest flops in tech history.

    they can make a Smart TV, even link it with the App store, but no serious gamer, I repeat NO SERIOUS GAMER would take whatever it is that Apple will offer as their console of choice.

    They would live off of the scraps of whatever is left by Sony and NIntendo (presuming Microsoft takes itself out of the equation).

    Apple is losing market share by the quarter in a area they LITERALLY invented (more or less), so you think they can come out of nowhere with no experience in that industry and make noise?

    That's like saying, "hey, i'm a really good manager. But i played basketball my whole life at the gym with friends. I think if i enter the NBA Draft i'll really change the landscape of the NBA".

    the concept is absurd

  • Report this Comment On November 09, 2013, at 10:47 PM, prginww wrote:

    I no longer trust this company. Be careful folks... MS wants to sell you products, but also wants to have full control over it as well as spy into your homes.

    Down with MS and Bill Gates.

  • Report this Comment On November 10, 2013, at 12:27 AM, prginww wrote:

    Wow, I'm really amazed that for the firtst time in quite awhile I agree with The Fools. MS shouldn't and won't sell Xbox as it is the XServer for their entire home ecosystem that will be the center of their consumer success in the future.

  • Report this Comment On November 10, 2013, at 12:45 AM, prginww wrote:

    XBOXone is already destroying the XBOX brand. MS is not the only party culpable just look at how horrible the next gen titles are.

    This system launch is the worst, even if they sold more than the wii u, they are still hurting from self inflicted PR wounds.

    Would investors hurt? Probably, but they would recover. Investing is about learning to deal with growing pains not just endlessly collecting positive dividends.

    I can't believe Motley Fools promotes bad investing practices.

  • Report this Comment On November 10, 2013, at 2:25 AM, prginww wrote:

    1 - Any 10 year old even would recognize spinning off Xbox as a mistake. Internal management divisions are enough separation. The suggestion is only put forth by people that are super greedy and/or do not understand the synergies that are coming together at Microsoft. Nor that have the faith to be steady as those synergies come to fruition.

    2 - I personally have used my Windows PC as a TV for years. Way my powerful than any box. And the functionality is built into all Windows computers/laptops/tablets etc ., right now.

    3 - Dude really? Xbox One , from what I have seen , has some pretty awesome/smart features and capabilities. Though , personally , I think if people were smart they would all back PC gaming exclusively and let all the consoles die . Give a kid a console and he will play and consume, sure. Give a kid a computer and , yes, he will play and consume, but then he/she will also be able to CREATE. You are putting a far more powerful tool into their hands with exponentially greater potential. Parents that buy their kids ipads ... it's like giving them a binky. So they can suckle themselves , via consumption, into contentment. While the PC kids grow up to be the ones that make the content the others consume. Think about it. ;)

  • Report this Comment On November 10, 2013, at 4:58 AM, prginww wrote:

    Just to point it out. Hardcore gamers uses both PC and consoles for their gaming. You're not really a hardcore gamer(in my definition) if you restrict yourself by only having one console or the PC. I'm willing to bet that someone who can spend more than $5000 for a gaming pc can spend $500 for a new console or two.

  • Report this Comment On November 10, 2013, at 2:21 PM, prginww wrote:

    Do people still pay for Office software? Does Word do much more than it did 20 years ago?

    The latest tech companies cannot focus on what is profitable now, but instead need to innovate.

    Google will provide any app that Microsoft does for free and it will be better.

    Just sit back and collect 2 billion from android for your patents and create the most awesome living room experience ever.

  • Report this Comment On November 10, 2013, at 8:59 PM, prginww wrote:

    I think this website is a joke and yet alone don't understand anything. Windows 8 was a joke by Microsoft, and Windows 8 cost Microsoft a lot of money and the sales of the Xbox 360 and properties kept Microsoft alive. Without Xbox Microsoft would of been a defunct company by now putting a lot of money into a joke operating system like Windows 8. Windows 8 was supposed to be the whole home operating system, doing gaming, handheld, phone and more but in the end it turned out to be a problem.

    So why would a company that has gained a lot from a console like the Xbox sell it? The data on here is wrong for one, you are comparing one year to what? Ten years? Thats like basing the Sony Playstation 2 sales off the final year where the sales were down, but he PS2 was a strong selling console, the same goes with the Xbox 360 and now the Xbox One, you can't preorder them now. Both consoles WILL NOT see if they are a hit or miss console for at least 2-4 years. You'll have to wait till that time to see if the Microsoft Brand should sell the Xbox Division or not.

  • Report this Comment On November 10, 2013, at 9:29 PM, prginww wrote:

    first off no one would be selling xbox to other company. what this would be is xbox would be its own company. no one would be buying it or selling the brand. it would just be xbox company.

  • Report this Comment On November 11, 2013, at 10:34 AM, prginww wrote:

    Microsoft needs to take a step back and realize what the consumer wants when it comes to the Xbox. NOBODY want a system that "acts" like a cable box. As far as that goes, what companies will this be compatible with? Gamers also do not care about being able to have a voice activated controller or being able to make calls on Skype with their system. Lets work on being a video game counsel like you started off. Xbox sales are going to tank if Microsoft does not start to listen to the people that play it. I for one, am refusing to buy an Xboxone and will be purchasing a PS4.

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