Should Microsoft Ditch the Xbox?


After years of hemorrhaging money, the Xbox is one of Microsoft's shining stars of device successes. But while the Xbox is a great product, Bloomberg just reported this week that Microsoft CEO candidate Stephen Elop may want the device -- and other services such as Bing -- to be dropped from the company.

Xbox One. Source: Microsoft..

Looking ahead
The Bloomberg article said Elop would "consider ending Microsoft's costly effort to take on Google with its Bing search engine" if he he got the job, and that he "would also consider selling healthy businesses such as the Xbox game console if he determined they weren't critical to the company's strategy."

This mirrors information from an interview with the Financial Times, in which Microsoft co-founder and investor Paul Allen said he'd like to see Microsoft CEO Steve Ballmer's successor spin out the Xbox and Bing search engine because they don't contribute to the majority of Microsoft's software and services revenue.

It's not the first time someone has suggested that the two endeavors are taking too much time and energy from Microsoft. After the Xbox One was unveiled, an analyst at Nomura Equity Research, Rick Sherlund, said the Xbox "doesn't seem like a good enough business for Microsoft to focus on" and said that Bing should be spun off as well.

But is now the best time to leave the Xbox behind?

Microsoft's Entertainment and Devices division, which houses the Xbox, ran operating losses for years but has recently become profitable. In September, Microsoft's chief marketing officer, Yusef Mehdi, said at the Citi Global Technology conference that the worst-case scenario for the Xbox One is that it will be a breakeven or low-margin device. But he said devices like this make their money over the long term and that the Xbox 360 is very profitable now after being released eight years ago.

When Ballmer restructured the company back in July, there was a new focus around consumer products. Now more than ever, Microsoft has a focus on designing its own hardware and software and selling devices to consumers. With Xbox's division making money, the Xbox One just launching, and Microsoft trying to gain more consumer attention, now would be a bad time to ditch the product.

Source: Microsoft.

On the other hand, Microsoft's former Online Services division, which encompasses Bing, had a writedown of $6.2 billion last year for the purchase of the online advertising company aQuantitative. The purchase ended up being a bust for the company, and Microsoft completely lost out on the huge purchase.

In a research note this week, Nomura's Sherlund reiterated that Bing should be spun off, saying that the search engine has cost Microsoft $17 billion over the past 10 years. Sherlund said that if a new Microsoft CEO axed both Bing and Xbox, then earnings would eventually increase by $0.47 per share.

A few Foolish thoughts
While there's a strong case for leaving Bing behind, letting the Xbox go at this point wouldn't be the best move. The Xbox One may not grab the attention of non-gamers as much as Microsoft hopes, but it can be used as an inroad to other devices and services if the company can pull its Windows platforms into one singular experience.

Apple is already firmly planted in the living room with Apple TV, wants to be there with its own device, and other tech companies see the living-room space as one of the next huge markets in tech. While the Xbox One isn't a device for the average consumer, the technology behind it could be adapted so that a version of it could be. For Microsoft to ditch the one device it's made recently that can be called a true success would be a mistake. If Elop ends up taking over as Microsoft's CEO and letting the Xbox go, investors may never see the full potential Microsoft has in the space -- and that would be a shame.

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