Why Microsoft Shouldn’t Ditch the Xbox

Despite the press surrounding Microsoft's (NASDAQ: MSFT  ) sale of 2 million units of the Xbox One, many still aren't convinced the product fits in with the rest of the company. Microsoft's CEO candidate Stephen Elop is still being quoted saying he would consider spinning off the business if he determined it wasn't critical to Microsoft's strategy. It is not the first time someone has said the Xbox is taking too much energy from Microsoft. So should Microsoft ditch the product?

A moneymaker investors need
Investors need to understand the economics of a device like the Xbox. As we've seen in other devices, prices for components tend to fall over time. Microsoft should see the overall input cost for the product decline further in its product circle. It is not surprising Microsoft's Chief Marketing Officer Yusuf Mehdi said devices like this make money over the long term. Microsoft needs to lose money today to make money later.      

The new music
The Xbox One carries a special strategic importance to Microsoft. When CEO Steve Ballmer reorganized the company a few months ago, there was a new focus around consumer-orientated solutions. Microsoft now has the strategy to sell devices to consumers, and it needs a mass-market success. The Xbox One will offer consumers a rich user experience.

Although many debate if Microsoft will be focused on the consumer market, the Xbox is the company's best chance to gain an ecosystem advantage in the "smart" living room. Gaining advantage in this sector is crucial. Additionally, the Xbox can help extend Windows and Microsoft's other software. With Microsoft trying to gain more consumer attention in the living room, now is not the time to ditch the product.

The living room battlefield
If Microsoft wants to focus on enterprise customers, getting rid of the Xbox might make sense. But if Microsoft wants to be a consumer-orientated company, it needs the Xbox. Consider the steps being taken by its competitors. Apple's (NASDAQ: AAPL  ) management has seen opportunities in the living room. Apple could introduce its TV anytime now. Some analysts are saying that the TV could be 12 months away. If Apple brings its mobile operating system to TV, it could also act as a game console.

Amazon (NASDAQ: AMZN  ) also wants to be in the living room with its own devices. It is said to be working on its own set-top box. The product will be a device to rival an Apple TV. Sources say it is based on Android and will allow third-party apps. Much of the code that works with Amazon's tablets can be applied to the product. The Wall Street Journal says it will also serve as a vehicle for Amazon's video service. Amazon hasn't confirmed the device's existence, but it could be introduced anytime in the future.

Bottom line
It would be a mistake for Microsoft to part ways with the Xbox. The product gives the company an edge in the living room. This is an area that many expect consumer-electronics companies to focus on next. Microsoft needs a living-room console to fend off Apple's upcoming TV. If Microsoft ends up letting the Xbox go, investors might never see the full potential Microsoft has in this sector.

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