It's no secret that Microsoft (NASDAQ:MSFT) has faced difficulties with the unveiling and marketing of its upcoming Xbox One console. The foibles surrounding the upcoming hardware have been a frequent subject of media discussion, further complicating the device's future and creating a wave of negative publicity that Microsoft has struggled to combat.
The system's feature set and associated strategic vision look a lot different than they did when the Xbox One was revealed in May. It no longer requires Kinect to function, its CPU has received marginal clock speed upgrades, there is no online connectivity requirement, and used games can be played without any system level restrictions. That said, the image problem still remains, and early reports suggest that Sony's (NYSE:SNE) PlayStation 4 enjoys a significant mindshare and preorder sales lead. Now, in the midst of the One's difficulties, some investors are calling for Microsoft to sell off its gaming division.
It's still far too early to label the Xbox One as a failure. That said, the planning and early marketing for the system can certainly be classified as such. There are notable portions of the Microsoft shareholder base who have already begun calling for the company to sell off the Xbox division.
Activist investor firm ValueAct Capital Management holds approximately $2 billion in Microsoft shares and has stated that it would like to see the company dump off the Xbox brand to a willing buyer because it does not produce the kind of profit margins that are created through software offerings like Windows and the Office suite. The hedge fund also called for the firing of CEO Steve Ballmer prior to announcements of his impending exit and an increase in the dividend yield that the company pays out to investors.
It appears that ValueAct has had a profound impact on recent decision-making at Microsoft, and it might play an even bigger role going forward. It was announced in the beginning of September that the hedge fund would have a seat on the board beginning in 2014. It was also recently announced that Microsoft would raise its dividend payouts by 22% and that it would be initiating a $40 billion buyback program. With these changes set to be implemented and the apparent influence of ValueAct, it's looking more likely that Microsoft could choose to seek a buyer for its console gaming division.
ValueAct may have a point when it posits that the returns on the Xbox investment have not been worth the substantial capital that Microsoft has invested. That said, Xbox stands as one of the company's strongest consumer brands.
Microsoft does not have the same brand appeal as an Apple (NASDAQ:AAPL) or Google (NASDAQ:GOOGL), but has shown a desire to reshape its business model so as to be more in line with these competitors. In fact, many believe that the strategy behind the pre-reversal Xbox One was aimed more at pre-empting potential gains by Apple and Google in the battle for the living room than at besting Sony's PlayStation 4 console. Microsoft has expended a substantial amount of time and resources since entering the gaming fray. The Xbox brand is still strong, it just hasn't been managed effectively as of late.
Battle for the living room
Even though Sony's PlayStation 4 looks to be the early sales favorite, there is still time and incentive for Microsoft to right the Xbox ship. The fact that the two consoles use very similar hardware architecture means that the system is sure to receive third party support throughout its lifetime even though the PS4 has a distinct power advantage. As such, there is very little chance that Microsoft will choose to ditch Xbox anytime within the next five years.
If Microsoft were to ship an Xbox One SKU without Kinect, it would be able to achieve price parity with the PlayStation 4 relatively early in its lifecycle. The negative reactions to the reveal of the Xbox One and the comparative excitement that seems to surround the PS4 forced Microsoft to acknowledge Sony as its primary competitor in the space.
Still, Mr. Softy is undoubtedly eyeing the long-term game where Apple and Google look to be dominating forces. AppleTV and Google TV have yet to really take off, but the respective tech giants behind these devices have telegraphed intentions to dominate the living room.
Interestingly enough, the Xbox line was created by Microsoft to ensure that Sony did not gain control of the home entertainment space with its consoles. Now, there are other and bigger threats to worry about. The Xbox brand could be vital if Microsoft hopes to continue competing in the home entertainment space.
What's more, the company may face difficulties finding a buyer if it chooses to abandon the Xbox brand. There are not many companies who are equipped to launch and maintain mass-market gaming hardware and services.
For these reasons, you can expect Microsoft and Xbox to stick together, even if there are bumps along the road.