Why Selling the Xbox, and Shutting Down Bing, Makes No Sense for Microsoft

Microsoft (NASDAQ: MSFT  ) has, according to Reuters, narrowed its list down to just five possible candidates to succeed Steve Ballmer as CEO. One of those candidates is said to be Stephen Elop, Nokia's now-former CEO. If Elop gets the job, he could sell off Microsoft's Xbox division and shutdown Bing, according to Bloomberg.

Both of those moves would be terrible for Microsoft. Although Bing remains far behind Google (NASDAQ: GOOGL  ) , it offers Microsoft great strategic value. Likewise, Microsoft needs the Xbox if it plans to continue to compete against Apple (NASDAQ: AAPL  ) among consumers.

Why would Elop make those moves?
On the surface, selling the Xbox and shutting down Bing appear to make some sense. Neither division has been a source of major income and both divisions are arguably outside of Microsoft's core business.

Bing, in fact, has cost Microsoft over $11 billion since its inception, while Microsoft has little to show for it -- it remains in distant second place behind Google. The Xbox, buried within Microsoft's Devices and Consumer hardware division, has been thought to be modestly profitable, but last week, analysts at Nomura wrote that the Xbox is actually costing Microsoft billions -- losses on the Xbox have been masked by patent royalties collected on Google's Android.

Getting rid of these two divisions could help Microsoft focus on Office and Windows -- the two products that have brought in the vast majority of Microsoft's earnings and revenue in recent quarters. Microsoft shares have underperformed over the last 10 years, as the company's mammoth size may have kept it unfocused.

Bing is finally starting to show some promise
But to get rid of Bing right now would be short-sighted. Although it's been a money pit for Microsoft to date, Bing could finally be on the verge of emerging as a key Microsoft technology. Windows 8.1, the recent update to Microsoft's Windows operating system, integrates Bing heavily into the Windows experience, using the search engine to power local desktop searches.

But more than serving as the backbone of Windows, Microsoft's Bing has great potential in terms big data. Predictive search appears to be the next great growth area for technology -- apps like Google Now processing immense amounts of information to provide personalized recommendations before the user even requests it.

Microsoft is well-positioned to move into this area because of Bing, according to Microsoft's current CEO, Steve Ballmer. Last year, he told the Churchill Club that he was glad to spent so much money on Bing (via Business Insider):

"We've made a tremendous investment...And it's not easy to make. It's not easy...in terms of talent...in terms of infrastructure...you don't have big data until you have it...indexing the web is kind of the biggest big data problem...these are big data/machine learning and we've made a big investment and it's one I'm probably far more excited about than people would think."

The Xbox One is more than just gaming
Likewise, the Xbox might be thought of as an investment. Microsoft's upcoming Xbox One is far more than just a video game console -- its advanced TV features make it an all-in-one entertainment hub; a connected centerpiece of a digital living room.

As Microsoft's rivals, including Apple, prepare to enter the space, Microsoft would be well-served standing pat. Although it hasn't (yet) materialized, an upcoming Apple smart TV has long been rumored, and has been reinforced by statements both from Steve Jobs and Apple's CEO Tim Cook.

If Microsoft is no longer interested in competing in the consumer market, then getting rid of the Xbox might make sense. But if Microsoft still wants to compete with Apple, then getting rid of the Xbox would be a mistake.

Microsoft is a company in flux
Clearly, Microsoft is in the midst of a major upheaval. Whichever executive is ultimately named Microsoft's next CEO will get an opportunity to remake the firm dramatically. Though it hasn't faltered, Microsoft's performance in recent years has definitely been disappointing, and a shakeup of some sort could help the company regain its position as the top technology firm.

If, however, that executive is Elop, and his shakeup includes shutting down Bing and selling Xbox, investors should be concerned with the firm's future.

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  • Report this Comment On November 12, 2013, at 5:15 PM, KenLuskin wrote:

    Good article!

    Microsoft's Grand plan: Its all about the ECOSYSTEM

    If Apple's (AAPL) customer loyalty is all about the ecosystem, why not for Microsoft?

    When you ask people, analysts, whoever, about why Apple won’t lose all their customers to lower cost, and/or better devices, they say its all about the ecosystem.

    The Cloud paradigm is about about providing an ecosystem of services.

    Google created and supports a free operating system called Android, so that the default settings drive people to their cloud services.

    Google's business model is providing free services, that are supported by advertising.

    It is very difficult to compete against something that is free.

    As Google slowly improves their software offerings, there will be constant pressure on Microsoft's model of charging for software.

    Microsoft's Board of Directors understood this situation a number of years ago, and began an aggressive long term investment program.

    Microsoft had 2 distinct choices

    They could greatly reduce R & D, increase dividends, and shrink away into a company like CA technologies, a provider of legacy software.

    Or, they could continue to use their world class R & D operation to create and grow a cloud ecosystem, which would throw off cash flow for eternity.

    The Xbox live subscriber base is a cash flow machine

    Microsoft now has 50 million Xbox live subscribers, and that number will grow dramatically with the release of the new Xbox One.

    The Xbox live 50 million subscribers is similar in size to Wall street darling Netflix's (NFLX) current subscriber base.

    How is it that Wall Street loves the Netflix business model, but does not like the Xbox business model?

    Netflix does not have the large costs of supporting a hardware infrastructure, but they have the large costs of continually purchasing content.

    The large base of Xbox live subscribers, attracts independent software companies to create content for the platform, similar to the Android and Apple App ecosystems.

    If the Xbox business was owned by Apple or Google, Wall street would be singing its praises, in my opinion.

    Search is key to devices

    Microsoft has invested Billions $$ into its search service called Bing, but it is still losing money. It is losing money because of the low volume of users.

    Google did such a good job of equating its name with search, and driving the vast majority of searches to its site, that it commands massive advertising revenues and profits.

    If Apple's (AAPL) customer loyalty is all about the ecosystem, why not for Microsoft?

    When you ask people, analysts, whoever, about why Apple won’t lose all their customers to lower cost, and/or better devices, they say its all about the ecosystem.

    The Cloud paradigm is about about providing an ecosystem of services.

    Google created and supports a free operating system called Android, so that the default settings drive people to their cloud services.

    Google's business model is providing free services, that are supported by advertising.

    It is very difficult to compete against something that is free.

    As Google slowly improves their software offerings, there will be constant pressure on Microsoft's model of charging for software.

    Microsoft's Board of Directors understood this situation a number of years ago, and began an aggressive long term investment program.

    Microsoft had 2 distinct choices a few years ago

    They could greatly reduce R & D, increase dividends, and shrink away into a company like CA technologies, a provider of legacy software.

    Or, they could continue to use their world class R & D operation to create and grow a cloud ecosystem, which would throw off cash flow for eternity.

    The Xbox live subscriber base is a cash flow machine

    Microsoft now has 50 million Xbox live subscribers, and that number will grow dramatically with the release of the new Xbox One.

    The Xbox live 50 million subscribers is similar in size to Wall street darling Netflix's (NFLX) current subscriber base.

    How is it that Wall Street loves the Netflix business model, but does not like the Xbox business model?

    Netflix does not have the large costs of supporting a hardware infrastructure, but they have the large costs of continually purchasing content.

    The large base of Xbox live subscribers, attracts independent software companies to create content for the platform, similar to the Android and Apple App ecosystems.

    If the Xbox business was owned by Apple or Google, Wall street would be singing its praises, in my opinion.

    Search is key to devices

    Microsoft has invested Billions $$ into its search service called Bing, but it is still losing money. It is losing money because of the low volume of users.

    Google did such a good job of equating its name with search, and driving the vast majority of searches to its site, that it commands massive advertising revenues and profits.

    Microsoft has proved that their search results are equal to or better than Google's, but that does not immediately result in people changing the default on their computers and other devices.

    For Microsoft to evolve into a cloud services provider, they must have a robust search capability, which is key to advertising revenues and profits.

    SKYPE+ BING+ GAMING CONTENT+ OFFICE= A ROBUST CLOUD ECOSYSTEM!

    Since buying music on iTunes has been replaced by successful free music services, Microsoft has more attractive cloud services than Apple, in my opinion.

    Microsoft gaining market share in mobile

    While Google's Android appears to have a lock on mobile OS, because of their superior App offerings, Microsoft has key strengths.

    Since Microsoft is already earning decent royalties from all the major mobile phone manufacturers, it is not hard to imagine them offering more windows based models.

    Most top reviewers give windows phone OS a thumbs up, with many finding the "tile" structure superior to either Android or Apple's iOS.

    Microsoft has all the key ingredients for success in mobile and the consumer cloud

    While Microsoft's execution and reaction to the new cloud paradigm has been slow, they now have all the pieces in place for a dramatic surge in market share.

    Nobody else owns all the key pieces for success in the consumer cloud.

    Microsoft will be able to leverage its key properties into a robust ecosystem that will attract more outside application developers, in my opinion.

    Bottom line, Wall Street is myopic as usual

    Wall Street will almost always choose a quick today, over many bucks down the line.

    That is why is the bulk of the financing for successful technology companies is done far, far, away from Wall Street, in Silicon Valley.

    Companies go to Wall Street to cash out, not for the risk capital to create and build world leading enterprises.

    Wall Street beats a very noisy short term drum, which can drown out the advice from visionaries living in quieter more contemplative places, like Omaha, Silicon Valley, and Seattle.

  • Report this Comment On November 12, 2013, at 5:50 PM, melegross wrote:

    I just can't wait until the Justice department and the EU look at Bing, and realize that there is no real way to replace it with anything else, such as Google search. Same thing for IE in Win 8s Modern UI.

    I'm surprised that Google itself hasn't already made a legal move.

  • Report this Comment On November 12, 2013, at 6:31 PM, KenLuskin wrote:

    Why would DOJ and EU want MSFT to replace bing with a MONOPOLY search from Google?

    You canNOT be serious!

    Google owns the vast majority of the search, so much so that the DOJ is investigating them.

    PCs are NO longer a monopoly on reaching the internet.

    Integrating search into MSFT's cloud, does NOT prohibit a person from going to another website, such as google to search.

    Devices are capable of going to any website.

    If you buy an Apple device it comes with a safari browser... Is that a monopoly?

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