Microsoft pushes further into video game market

Microsoft (MSFT) is divided into five operating divisions. The three that make and market software are very profitable. The company's online division is a big loser.

The fifth operating unit, which makes video games, has lost billions of dollars building its Xbox franchise. The effort has not been very successful because, even after all of that investment, Microsoft's game operation only makes a tiny profit.

The world's largest software company refuses to give up on the video game business, however, and it seems that it is willing to throw more cash at the troubled unit. According toThe Wall Street Journal, "The Redmond, Washington, company said the purchase of BigPark Inc., a Vancouver-based company that is staffed by veterans from Electronic Arts Inc., will give Microsoft control of a new game that BigPark is developing exclusively for the company's Xbox 360 game console."

The deal is complicated by the fact that the head of BigPark is also an executive in the Microsoft game division. That clearly was not enough of a problem to keep Redmond from closing the transaction.

The merger does make some sense. Video games are typically more profitable than video game consoles because of the cost of console hardware components. If Microsoft can build a successful game franchise, it may be able to improve its margins.

But Microsoft's continuing support of the Xbox franchise is part of what troubles investors. Wall Street cannot understand why the company insists on dragging down earnings by being in a business that will never earn the kind of profits that software does. It is also a business that bears almost no relationship to Microsoft's flagship Windows enterprise.

Every time Microsoft makes a move that takes it deeper into the game business, its shareholder lose a little more faith in the company's plans.

Douglas A. McIntyre is an editor at 24/7 Wall St.

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