Should Microsoft ditch the Xbox?

After years of hemorrhaging money, the Xbox is one of Microsoft's shining stars of device successes

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

After years of hemorrhaging money, the Xbox is one of Microsoft's  (NASDAQ: MSFT)  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 US$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 US$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 US$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, Amazon.com 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.

A version of this article, written by Chris Neiger, originally appeared on fool.com

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »