Microsoft would exit the games business before selling Xbox division

Countering comments from Nomura Equity Research, other analysts tell us that selling off the Xbox business would be "beyond stupid"

Rumors have pointed to Microsoft evaluating a major restructuring of the company, and along with the report came interesting commentary from Nomura Equity Research analyst Rick Sherlund who said that Microsoft should sell off its Xbox division. Just how likely is this scenario, and does it even make sense?

Certainly not now, not right before the company is looking to launch the Xbox One, independent analyst Billy Pidgeon told GamesIndustry International. "I don't think this scenario is likely at all. I can't see the upside of a deal like that for Microsoft or for a potential buyer at any time, but particularly before the Xbox One launch such a move would be beyond stupid," he said.

Wedbush Securities' Michael Pachter doesn't think it's quite as ludicrous, but he doesn't see a great advantage to spinning off Xbox either. "I don't think there are many synergies with the core enterprise software business at Microsoft, so I see little benefit in their being combined and little detriment if they were to split up. There is synergy with Skype, so as long as those were packaged together, I think Xbox would be fine as a standalone company," he said.

Microsoft is sort of caught in a tough spot between brand perception and financial reality. As a brand, Xbox is actually very helpful to the company. It's not very helpful for Microsoft's bottom line, however.

"It is simply too unwieldy to try and sell an entire game system hardware and software business...they would have trouble coming to terms with a potential buyer and more likely just exit the game business entirely"

David Cole

"I think the Xbox division would probably get a better valuation by itself than it is in the current conglomerate form of Microsoft as Xbox is outgrowing the sluggish Office and Windows divisions. That being said, I think it is very unlikely that Microsoft would spin it off. The idea that another company like Samsung would acquire that spun off Xbox division is even less likely. Xbox is the only thing that has investors excited about Microsoft, so it makes little sense to divest of the division," explained Asif A. Khan, CFO of Virtue LLC.

"There have been a number of calls for Microsoft to break itself up over the years, and so far they are still the giant tech behemoth that has languished below $40/share since the tech wreck of 2000. While I agree with Rick Sherlund that Xbox will most likely never materially effect Microsoft's earnings, it provides an intangible positive sentiment around the company. This goodwill should not be discounted as immaterial, and I sincerely doubt Microsoft will take the innovative Xbox division for granted."

While some investors may like the idea of spinning off Xbox, at this point Microsoft is just too committed, noted DFC Intelligence's David Cole. In fact, Cole thinks Microsoft would be better off just exiting the games business than to try and sell the Xbox division.

"Microsoft's forays into more consumer oriented products have generally been seen as a drag on the rest of its business. The Xbox has been a success from a consumer perspective but not so much financially. Now Microsoft has to start from scratch with a new game system that could be a drag on earnings. Meanwhile other Microsoft consumer forays have not done as well as Xbox," he said.

"I think the possibility of them selling to another company is unlikely. It is simply too unwieldy to try and sell an entire game system hardware and software business. My thought is they would have trouble coming to terms with a potential buyer and more likely just exit the game business entirely. But I don't see that happening anytime soon assuming they go ahead and launch the Xbox One. I think they are committed for at least the next few years."

There is an alternative scenario, however, which could satisfy investors and benefit Microsoft. Microsoft could essentially establish a new Xbox subsidiary, Khan said.

"One thing Microsoft could do is spin off the Xbox division as a subsidiary, akin to Dan Loeb's proposal for Sony Entertainment. This would allow the market and investors to value Xbox separately from Microsoft. Microsoft would not divest the Xbox division in this scenario, and would benefit from the potential capital appreciation of Xbox being a separately traded subsidiary. An example of this in the technology sector today is EMC's stake in VMWare. EMC owns 80 percent of VMWare, but both EMC and VMWare trade on their own in the public markets. Microsoft definitely has some options when it comes to their corporate structure, but the idea of completely divesting of the Xbox division or selling it to a competitor seem like the last two things they should consider."

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Latest comments (17)

Christopher Bowen Editor in Chief, Gaming Bus8 years ago
It was fun when our commenters were saying "that's a stupid statement from a stupid person", but when his PEERS are saying it? Comedy gold.
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gi biz ;, 8 years ago
I... must... resist..... the urge to troll.... :p

Edited 1 times. Last edit by gi biz on 4th June 2013 8:32am

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Bruce Everiss Marketing Consultant 8 years ago
There are a number of immensely popular, almost ubiquitous computing platforms.
Mobile/tablets, the desktop/laptop and the living room (console/set top box).
Microsoft don't just want to have a presence in each, they have an integrated approach where an individual's computing (including games) needs transfer seamlessly from platform to platform, with the cloud as the glue. No other technology company is doing this and it gives Microsoft a huge competitive advantage.
This strategy is in the middle of being rolled out, so it isn't obvious yet how it all integrates. When it is all in place it will be a fantastic achievement.
So, obviously, giving up on one platform would be akin to sawing off one of their own limbs. The damage would be horrific.
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Antony Carter Senior Programmer, Epic Games8 years ago
@Bruce "they have an integrated approach where an individual's computing (including games) needs transfer seamlessly from platform to platform"

Seems a strange thing to say when theyve just dropped all Backwards Compatibility for 360 games, on there new systems. And now we have the Xbox One who's games also wont be compatible with PC or Tablet. Not what id call transferring seamlessly.
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Nick Parker Consultant 8 years ago
The value of a business (indeed anything) is only as much as anybody would be prepared to acquire it for. A console business requires deep pockets as the new indie hardware devices are finding out so I'm not sure there would be many companies in the queue to take the games business off of Microsoft hands. If Microsoft, from a financial perspective, can't benefit from the division, why would anybody else think they could, or would want to, do a better job without carving it up? Too many negatives to this story and I hope not one which has spawned out of Sony's intentions for the SCE division, a very different company.
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Yiannis Koumoutzelis Founder & Creative Director, Neriad Games8 years ago
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Rick Lopez Illustrator, Graphic Designer 8 years ago
All this talk about selling out the XBOX business, makes me wonder if there servers will be around to authenticate all the XboxOne and online games 10-20 years from now. This is why im against online DRM and a digital only retail space. Nothing guarentee's those survers will be around and that everything you bought will work a few years from now. Its ironic that I can play 8-bit and 16-bit games with my kids in the future yet I cant play the more advanced ones with them because the will be rendered obsolete, buy microsoft at any moment they with too. The only way Id accept a digital only retail is if i can download copy and use the digital file on any platform that can run it and I can have a hard copy of the software on any media.
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Nicholas Lovell Founder, Gamesbrief8 years ago
Oh God, someone is looking at a conglomerate and thinking "tracking stock". Does no one have a memory of the 1990s? No one?
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Jim Webb Executive Editor/Community Director, E-mpire Ltd. Co.8 years ago
If you apply the BCG Gorwth-Share Matrix, GE's Multifactor Portfolio Matrix or any other business portfolio analysis tool, you'd have to be out of your mind to come to the conclusion of divestiture.
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Seems that bet Bill made with the launch of the Xbox and all that investment will never be paid back! Mistake?
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Asif A. Khan, CPA Financial Reporter 8 years ago
@ Nicholas Lovell

I was asked to comment on Rick Sherlund's suggestion of spinning off the Xbox division. I said that it is incredibly unlikely multiple times, but I did suggest that a tracking stock would be better than any of the other possible suggestions. My main point is that Xbox should remain part of Microsoft. The real problem with Microsoft is that the PC industry is in decline, and a spin off of the Xbox division will do nothing to stop that negative momentum. I do remember the 90s, I was playing Super Nintendo and listening to alternative music on CDs. Simpler times... Snap into a Slim Jim, Nicholas.
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Curt Sampson Sofware Developer 8 years ago
Bruce writes, "they have an integrated approach where an individual's computing (including games) needs transfer seamlessly from platform to platform."
Antony Carter writes: "Seems a strange thing to say when theyve just dropped all Backwards Compatibility for 360 games, on there new systems."

Oh, come now, come now. Surely you, as a "senior programmer," must realize the costs of backward compatibility. The aim to have people living in a Microsoft ecosystem has to be balanced with business reality; backwards compatibility with the Xbox 360 was about as likely as MS giving every Xbox 360 owner a free PC and copy of Windows.
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Paul Jace Merchandiser 8 years ago
Now I know how all those Nintendo fans feel everytime an analyst suggest they bring their games to other platforms.
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Adam Campbell Product Manager, Azoomee8 years ago

That may not be completely fair, especially given how abstract development and programming often is in the modern era. I'm most definitely not a senior programmer but as it happens, one of my biggest areas of interest is system architecture so I have no trouble seeing the immediate problem with the backwards compatibility task, even on what seems like significantly more powerful consoles.

If the misunderstanding is not so much a technical one as much as a business one, say why did Microsoft choose AMD and X86 processors over IBM and next generation PowerPC? That's another question altogether. Some would assume AMD offered the best performance and form factor for the best price. Maybe Microsoft also didn't want their rival to have a system more comparable to desktop PCs than their own, though that would be speculation...
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Andreia Quinta Photographer 8 years ago
PC industry is in decline
If you mean the PC Gaming industry I'd have to disagree.

Otherwise, that's a very dodgy 'maybe' at best. There's an increased tendency to deviate from buying a PC/MAC because tablets have taken a slice of the market-share, a very thin slice in comparison. What tablets/smart-phones can and can't do when compared to a PC is still a huge gap (I can't imagine (yet) entire offices running with alternate devices instead of PC's).

Edited 1 times. Last edit by Andreia Quinta on 5th June 2013 12:08pm

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Antony Carter Senior Programmer, Epic Games8 years ago
@Curt Sampson

Yes i understand the cost of BC and why there not doing it due to there different architecture.
But i was commenting on Bruces Seamless solutuion you try telling the general public that there offering a seamless gaming solution. when all there digital games are no longer playable on there new device.

There not gonna be all smiles about it, can you imagine if the Film or music industry had done such a thing when DVDs and CD were replaced by blu rays and digital download. Thankfully blu ray players play dvds and itunes lets you rip CDs. Sony arent offering an ideal solution either but they said there gonna try with Gaikai, where as MS said you must be backwards if you want to play old content, Nice.
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Asif A. Khan, CPA Financial Reporter 8 years ago
@ Andreia Quinta

I am only talking about sales of PCs. Clearly there will always be a market for PC games as the hardware is constantly updated to be the best available to developers. I am talking about the -11.2% PC sales growth for Q1 2012- Q1 2013. This is a threat to Microsoft's flagship Windows and Office franchises. That was the point I was trying to make. I am not saying that smartphones and tablets provide a superior gaming experience to PCs, just that PC sales are suffering.

Here is a link to the Gartner PC sales data:
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