Microsoft's Xbox Isn't Going Anywhere

Microsoft's CEO puts talk of an Xbox spin-off to bed.

Sam Mattera
Sam Mattera
Jul 19, 2014 at 1:45PM
Technology and Telecom

Despite releasing a new Xbox just last November, Microsoft's (NASDAQ:MSFT) commitment to its video game division has been somewhat unclear in recent months. Late last year, reports indicated that Microsoft might even consider selling or spinning off the Xbox division, shifting its focus to more core business units instead.

But last week, CEO Satya Nadella reiterated Microsoft's commitment to the Xbox. In an email to employees, Nadella wrote that the brand was integral to Microsoft's future.

As Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) look to the living room, Microsoft's ownership of Xbox remains advantageous.

Not core, but important
Nadella specifically referred to the Xbox as being outside of Microsoft's core, which, as he defined it, centers around "help[ing] people get stuff done" in a "mobile-first, cloud-first" world.

But even though it isn't part of the core, it's still important. Nadella argued that Microsoft benefits from the Xbox, for its valuable consumer brand and also as a sort of digital playground -- technologies and services originally conceived and developed for gaming (like graphics and voice recognition, among others) can be repackaged and redeployed for productivity.

Xbox's role in the mobile-first world
Nadella also noted the importance of gaming in the mobile world, writing that "the single biggest digital category, measured in both time and money spent, in a mobile-first world is gaming."

According to analytics firm Flurry, more than two-thirds of the time people spend on tablets, and more than one-third of the time spent on smartphones, is spent playing games.

This is interesting in the sense that the Xbox is far from mobile -- at least, in terms of what that term is commonly thought to imply. The mentioning of the Xbox in terms of mobility may seem to hint at a forthcoming Xbox-branded tablet or smartphone (there have been vague rumors of one in the past), but Nadella clarified the point by stating that Microsoft defined mobility in terms of "experiences."

Controlling the living room
Those mobile experiences could soon extend into the living room. Last month, at its developers conference, Google unveiled Android TV, the search giant's latest attempt at extending its mobile ecosystem into the living room.

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Android TV, as its name implies, brings Google's mobile operating system to TVs. Smart TVs and set-top boxes powered by Android TV will arrive in stores later this year. Although the focus appears to be primarily centered on streaming video, Android TV can access Google's app store, and like Microsoft's Xbox consoles, play video games. Video game accessory giant Razer has already announced a video game-focused Android TV set-top box, and others could follow.

Apple's ambitions are less concrete, but definitely there. Earlier this year, Apple's management removed the "hobby" moniker from the Apple TV set-top box, noting that the $1 billion in revenue the $99 box has brought in is simply too sizable to ignore.

Apple has been rumored to be working on a major update to Apple TV for quite some time, and including support for iOS mobile games seems like a no-brainer. Mobile developers, many of which are making significant money from Apple's app store, could turn their focus to the living room. Nat Brown, one of the creators of the original Xbox, has predicted that Apple's forthcoming entrance into the living room would spell doom for the existing console players.

Remaining relevant with consumers
As Nadella admits, Xbox isn't central to Microsoft from a financial standpoint. Indeed, although it's difficult to break out the Xbox's actual performance (being hidden in a maze of divisions) analysts believe that it costs Microsoft billions to maintain. Nomura, for example, estimated that the Xbox division lost around $1 billion last year.

But Microsoft's new CEO evidently sees that as money well spent. Its ownership of Xbox could allow it to thwart Apple and Google's attempts to enter the living room, and remain relevant among consumers.