Is This the End of Microsoft's Xbox?

Nokia's former CEO has recently been appointed to head Microsoft's devices and studios wing. Does this indicate that Microsoft will soon sell off its Xbox business?

Mar 9, 2014 at 7:00AM

Screen Shot

Source: xbox.com

The last year has been a difficult one for Microsoft's (NASDAQ:MSFT) XBox business. Even though the most recent estimate from the company has its newest gaming console surpassing a respectable 3.6 million units sold, Xbox One is being overshadowed by Sony's (NYSE:SNE) Playstation 4. The claims that Xbox One is a complete and total failure are premature, but the console's current market difficulties were largely predictable. Amid the controversies and negative press that accompanied the introduction of the One, powerful voices within Microsoft began a heightened push to sell off the company's gaming business.

That the Xbox business returns small margins in comparison to those of Windows and Office is undeniable. Whether that means that the gaming division is not worth maintaining is another matter entirely. The ascension of Satye Nadella (a man with a background in network and cloud services) to the company's top position only encouraged notions that Microsoft could be looking to find a buyer for Xbox. Now, former Nokia CEO Stephen Elop has been named the head of Microsoft's devices and studios division. What could this mean for the future of Xbox?

From Microsoft to Nokia and back
While Microsoft searched for its next CEO, Stephen Elop was one of the most visible candidates. Elop guided the sale of Nokia before returning to Microsoft. There was even some speculation that Elop's ascension and management of Nokia included elements of corporate espionage and that he had intentionally made Nokia an easy buy for Microsoft. His tenure at Nokia received widely varying reviews, with many critics pointing to his engineering of the $7.2 billion sale of the company's devices and services division as his defining (and somewhat suspect) achievement.

Stephen

Source: computerworld.com

Nokia's stock price dropped approximately 60% between the time of Elop's appointment in 2010 and his departure amid the first substantive rumblings of the big sale in 2013. In the lead-up to Satye Nadella's appointment, Elop stated that he would consider selling the Xbox business.

Amazon gets in the game
The appointment of Elop as the head of Microsoft's devices and studios division came on the heels of rumors that discussions with Amazon (NASDAQ:AMZN) had begun about a potential purchase of the Xbox business. All signs point to Amazon becoming a bigger player in the gaming industry within the next several years. The company is expected to release a set-top box sometime this year and it has already started to acquire game development studios. While some voices within Microsoft are eager to get out of gaming, Amazon appears intent on moving in. The Internet giant's market-leading cloud infrastructure would make it an ideal purchaser of the Xbox business.

Sony slims down
If Microsoft is looking to engineer an exit from the industry, Sony is currently in the process of making its gaming outfit a more-efficient entity. The company has run into problems by offering its development studios too much freedom and failing to provide the necessary oversight. This has led to massively budgeted projects with unjustifiably lengthy development cycles that have contributed to the company's cash problems.

The Last Guardian from SCE Japan Studio began development in 2007 with an intended development cycle of approximately four years. While Sony has confirmed that the game is still in development, the title has not been seen since 2011. Company-wide layoffs have recently taken place and a number of gaming-related projects have been canned in the last year. Staying in the gaming business is more important for Sony than it is for Microsoft, but improved efficiency will be needed to secure the Japanese company's place in the industry.

Screen Shot

Source: playstation.com

Don't fear the reaper
If Microsoft is really looking to unload the Xbox business, there are few people with more experience in the related proceedings than Stephen Elop. His roles in the sale of Boston Chicken (later rebranded as Boston Market) to McDonald's and Adobe's purchase of Macromedia establish these types of massive transactions as his specialty. Throw in Elop's openly skeptical take on the viability of the Xbox business and it's easy to see where this could be heading.

Give it a few years...
With Sony's PlayStation 4 pulling ahead of the Xbox One in the early stages of the console race, the calls for Microsoft to separate from the gaming business appear increasingly valid. Microsoft built a strong brand with Xbox at considerable cost. With powerful voices like company co-founder Paul Allen publicly stating that the company should exit the gaming business, the days of the Microsoft Xbox look to be numbered. Stephen Elop could soon be adding another notch to his designer belt.

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Keith Noonan has no position in any stocks mentioned. The Motley Fool recommends Adobe Systems, Amazon.com, and McDonald's. The Motley Fool owns shares of Amazon.com, McDonald's, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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