Hands off my Microsoft (Nasdaq: MSFT) Xbox 360! This morning's Wall Street Journal offers a tantalizing teaser to its Breaking Views column: "Microsoft's Best Play For Xbox? Shed It."
Ouch! "It's time for Microsoft to stop pumping quarters into this project," Robert Cyran advises in the article. I disagree. The tone softens later, suggesting that the company spin off its Xbox business, but I think that would also be a big mistake.
Yes, Microsoft's been losing money since its inception. Subsidizing console hardware to reap more in software royalties hasn't been a profitable model for the company. After all, you don't see Microsoft giving away PCs just to sell you copies of Windows and Office in its flagship software business.
Distancing itself from the video-game business may seem like an even sounder strategy, given Sony's (NYSE: SNE) $100 price cut on its PS3 systems today.
Still, Microsoft's best hope is to embrace the Xbox. I'm sure that it doesn't need my words of encouragement. Unit sales projections may be off -- the Nintendo (OTC BB: NTDOY.PK) Wii is drawing greater crowds -- but the company still expects to finally turn a profit on the Xbox this year.
Fatter hard drives and a booming base of Xbox Live broadband subscribers mean more room for Microsoft to sell digitally delivered games, music, and movies. In other words, chunkier profit margins on the software side are on the way. Why would Microsoft back off such a big bet just as it's about to pay off?
I realize that a rash of hardware failures are resulting in a beefy $1 billion charge to cover extended warranty repairs, but the Xbox business model isn't on the receiving end of the console's infamous "red rings of death" malfunction. If anything, Microsoft is busy molding its Xbox model into just what investors want. Offering Take-Two (Nasdaq: TTWO) $50 million for a pair of exclusive digital Grand Theft Auto IV episodic installments? That's sheer genius.
The last argument for keeping the Xbox close, and its market potential closer, is that the Xbox is making Microsoft cool again. We all know what the iPod did to Apple's (Nasdaq: AAPL) computing renaissance. Pause a young Halo 2 combatant long enough to ask him what he thinks of Microsoft, and he'll give you the thumbs-up before blowing his opponent to bits.
Sure, the Xbox "halo" factor isn't circumferential enough to save the Zune. Then again, the iPod isn't apparently a wide enough shoehorn for Apple TV, either. Coolness isn't always contagious. It's still worth a shot, right? There's no reason to spin off the one reason for young, influential gamers not to think that Microsoft is a bland vanilla swirl of geekdom. Especially when the promised land is so close.
Power up with further Foolishness:
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Longtime Fool contributor Rick Munarriz has been a fan of video games dating back to Pong. He does not own shares in any of the companies in this story. He is also part of the
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