Would Microsoft be better off without Xbox?

Xbox One controller

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Some have suggested that Microsoft sell off its Xbox franchise as a way to cut losses and eliminate a distraction from more important things, but the video game console is an important part of the company’s overall plan going forward.

Xbox is one of four devices named by CEO Steve Ballmer as part of his One Microsoft vision (the others are PCs, tablets, and phones) and is important for tying entertainment (Ballmer calls it “serious fun”) into Microsoft’s overall vision.

”Interactivity takes engagement and makes things serious; it really requires differentiated hardware, apps and services,” he says in a July memo outlining Microsoft’s mission.

But one estimate puts Xbox losses at $2 billion, and an analysis of the hardware costs indicate Microsoft sells the gaming device on a razor thin margin. Profitability is hard to gauge given that Xbox results are lumped in on the balance sheet with Android phone royalties, Skype, and Windows Phone.

Nevertheless, Rick Sherlund, an analyst with Nomura Securities, says in a market note that Xbox is an orphan product within Microsoft. “It is a ‘cool’ product line and a successful consumer franchise, but it also loses a lot of money and we think it is a distraction to the more enterprise strengths of Microsoft,” he writes.

Not money-making hardware

IHS has taken the new Xbox One apart and says its parts cost $457, and the device sells for $499. Toss in other expenses to get the product out the door, and it’s not making a profit, IHS says. That is much the same situation with Sony and its costs for making PlayStation.

But that can be OK, says Steve Mather, senior principal analyst for IHS. “[T]hese companies easily can largely compensate for their losses through sales of highly lucrative game titles,” he says.

In addition to drain on financial resources, Xbox taps personnel. For example, Dave Cutler, who was a lead developer for both Windows NT and Windows Azure, was diverted to work on a special hypervisor for Xbox One. The device runs both the Xbox gaming OS and Windows 8 (customized) and the hypervisor helps smooth the transition between the two.

Microsoft is working on an Xbox store where developers can sell applications and games they have written for the device. It’s a big job because each app has to be vetted by Microsoft, which has to protect customer privacy. Since Xbox One includes a camera and motion detector, the company has to ensure they aren’t used to breach privacy.

Xbox Video does enable streaming content from the Web to the device, but also to customers’ Windows Phones and PCs via an Xbox video app.

Without Xbox, though, other lines of Microsoft products, notably those geared toward businesses, would be largely unaffected. So as some suggest, selling off the business might result in a leaner, better focused Microsoft.

Another side of Microsoft

In a rare one-on-one interview with blogger Mary Jo Foley, Ballmer says Xbox is important as a symbolic marker that Microsoft is still making new hardware and therefore remains relevant.

”Unfortunately, when the industry changes, if you haven’t built any new capability, you can become less relevant because the thing you were good at becomes less relevant and you didn’t build capability in a new area,”  she quotes Ballmer saying. That meant creating a team to make processors, and developing a supply chain for parts, which gave the company the experience to jump into making Surface tablet/PCs last year.

While Surface can mesh with the company’s broader service-delivery game plan, Xbox remains an outlier without which resources might be freed up to pursue the main goals.

This story, "Would Microsoft be better off without Xbox?" was originally published by Network World.

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