Should Microsoft Ditch the Xbox?

After years of hemorrhaging money, the Xbox is one of Microsoft's (NASDAQ: MSFT  )  shining stars of device successes. But while the Xbox is a great product, Bloomberg just reported this week that Microsoft CEO candidate Stephen Elop may want the device -- and other services such as Bing -- to be dropped from the company.


Xbox One. Source: Microsoft..

Looking ahead
The Bloomberg article said Elop would "consider ending Microsoft's costly effort to take on Google with its Bing search engine" if he he got the job, and that he "would also consider selling healthy businesses such as the Xbox game console if he determined they weren't critical to the company's strategy."

This mirrors information from an interview with the Financial Times, in which Microsoft co-founder and investor Paul Allen said he'd like to see Microsoft CEO Steve Ballmer's successor spin out the Xbox and Bing search engine because they don't contribute to the majority of Microsoft's software and services revenue.

It's not the first time someone has suggested that the two endeavors are taking too much time and energy from Microsoft. After the Xbox One was unveiled, an analyst at Nomura Equity Research, Rick Sherlund, said the Xbox "doesn't seem like a good enough business for Microsoft to focus on" and said that Bing should be spun off as well.

But is now the best time to leave the Xbox behind?

Microsoft's Entertainment and Devices division, which houses the Xbox, ran operating losses for years but has recently become profitable. In September, Microsoft's chief marketing officer, Yusef Mehdi, said at the Citi Global Technology conference that the worst-case scenario for the Xbox One is that it will be a breakeven or low-margin device. But he said devices like this make their money over the long term and that the Xbox 360 is very profitable now after being released eight years ago.

When Ballmer restructured the company back in July, there was a new focus around consumer products. Now more than ever, Microsoft has a focus on designing its own hardware and software and selling devices to consumers. With Xbox's division making money, the Xbox One just launching, and Microsoft trying to gain more consumer attention, now would be a bad time to ditch the product.

Source: Microsoft.

On the other hand, Microsoft's former Online Services division, which encompasses Bing, had a writedown of $6.2 billion last year for the purchase of the online advertising company aQuantitative. The purchase ended up being a bust for the company, and Microsoft completely lost out on the huge purchase.

In a research note this week, Nomura's Sherlund reiterated that Bing should be spun off, saying that the search engine has cost Microsoft $17 billion over the past 10 years. Sherlund said that if a new Microsoft CEO axed both Bing and Xbox, then earnings would eventually increase by $0.47 per share.

A few Foolish thoughts
While there's a strong case for leaving Bing behind, letting the Xbox go at this point wouldn't be the best move. The Xbox One may not grab the attention of non-gamers as much as Microsoft hopes, but it can be used as an inroad to other devices and services if the company can pull its Windows platforms into one singular experience.

Apple is already firmly planted in the living room with Apple TV, Amazon.com wants to be there with its own device, and other tech companies see the living-room space as one of the next huge markets in tech. While the Xbox One isn't a device for the average consumer, the technology behind it could be adapted so that a version of it could be. For Microsoft to ditch the one device it's made recently that can be called a true success would be a mistake. If Elop ends up taking over as Microsoft's CEO and letting the Xbox go, investors may never see the full potential Microsoft has in the space -- and that would be a shame.

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Read/Post Comments (4) | Recommend This Article (0)

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 10, 2013, at 3:54 PM, KenLuskin wrote:

    Good article!

    Wall street, Elop, and other are myopic.

    They will take a quick buck today, rather than many bucks over the long term.

  • Report this Comment On November 10, 2013, at 6:28 PM, kanemack wrote:

    This is by far the mos ridiculous article i have seen here to date. And that's saying a lot. This idea to sell xbox is like telling Sony to sell playstation, because they make more money elsewhere. Good thing Elop is not in charge.

  • Report this Comment On November 10, 2013, at 7:31 PM, butthead2u wrote:

    I truly believe that history will show what a great CEO Balmer was. Xbox and Bing never expected to turn a profit at the beginning, it' was always expected to take a decade. MS invests for the long term and has multiple long-term strategies to increase investors wealth.

    Xbox has the potential of becoming a huge money making machine. Interactive television could be huge and we have no idea what's coming yet! Why would you get rid of XBox when it has the ability to draw in millions of people with money? Bing also will be in every MS product that a billion people currently use!

    I can't believe people don't see what's coming together when it's all right there. When it's all linked it's going to be fantastic! Simple minds just can't put it together!

  • Report this Comment On November 10, 2013, at 9:00 PM, DjOuch wrote:

    ARE YOU PHAKING STUPID. I CANT BELIEVE THIS WEBSITE IS PAYING YOU TO WRITE SHEET LIKE THIS .

    Should Microsoft Ditch the Xbox?

    YOU ARE A PHAKING MORON.

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