Microsoft Corporation (NASDAQ:MSFT) revealed earlier this week that it was writing off the value of its Nokia division, a new sign that the firm was leaving the era of Steve Ballmer behind it. For gamers, the write-off leads to questions about Microsoft’s intentions in the Xbox One VS PS4 battle. The Xbox One was a Ballmer-driven product, and it’s already losing steam under Satya Nadella.
Rick Tullo of Albert Fried & Company compared the two firms in speaking about the new direction at Microsoft. “Like all these businesses that Sony is getting into, hyping the s*** out of it and doing nothing with it, Microsoft had the same thing under the old CEO,” he told Benzinga.
Microsoft abandons hardware
At Microsoft it’s clear that the Xbox One VS PS4 battle is nothing but a sideline, and the firm’s entry into the market is being marginalized. Last week the firm announced that it was rebranding its music business, removing Xbox from its titles. Xbox is the firm’s only successful hardware brand, but Satya Nadella, the firm’s CEO, is clearly losing faith in the business.
The write down of Nokia shows that Microsoft wants to get out of hardware as a main business. Shareholders, who have long been frustrated by the failures of Microsoft in hardware, welcomed the decision. Shares rose on Wednesday and Thursday after the firm revealed the decision.
Losing money with the Xbox One
For gamers it may seem that sales numbers, pricing and exclusives given out in the Xbox One VS PS4 battle are the be-all and end-all, but for Microsoft it’s waste of time and money. It was never clear if Microsoft made any money from the Xbox business during the highs of the Xbox 360. With sales of the Xbox One lagging the PS4, and the price of the console dropping, it’s not likely that it’s a cash cow right now.
Rick Sherlund, an analyst at Nomura, said in a 2013 report that Microsoft was losing money through its Xbox 360, even at the profitable end of the life-cycle of the device. Mr. Sherlund said that the firm was hiding the poor results from the Xbox division with royalties from Android.
He estimated that the “Xbox platform plus Windows phone and Skype lose about $2.5 billion per year, and we estimate that the Xbox platform may account for roughly $2 billion of this.”
Sherlund concluded, “It is a ‘cool’ product line and a successful consumer franchise, but it also loses a lot of money and we think is a distraction to the more enterprise strengths of Microsoft.”
Satya Nadella, unlike his predecessor Steve Ballmer, appears to agree. If the Xbox 360, which lead the market strongly during its tenure, lost that amount of money for Microsoft, the Xbox One is likely to be doing much more damage.
Microsoft hides Xbox One VS PS4 failure
Microsoft will release its results for the three months through June on July 21. In its last earnings report, the firm revealed that sales of the Xbox One were lower than they had been in the same period in 2014. Revenue from Xbox was just $1.8bn during the quarter, compared to sales of $21bn across the firm as a whole.
Margins in the Computer and Gaming Hardware segment, which covers the Xbox and the Surface, are much worse than in the majority of Microsoft’s other businesses. In the third quarter, gross margin on the hardware business came in at 23 percent.
Margins in Commercial Licensing, the business that shareholders want Microsoft to focus on, was 92 percent. Xbox, in the eyes of many shareholders, is keeping Microsoft from achieving its full value and full potential. With Mr. Nadella turning against hardware as a whole, now might be the time to shutter the business, or at least cut it off from the rest of the firm.
It’s important to note that the 23 percent margin on the Xbox division includes only cost of revenue, it does not include the costs of marketing the device, or the costs of research. It also doesn’t include Xbox Live, and some other revenue streams from the Xbox.
Those are put into Consumer Devices Other along with Search, making it difficult to get a full picture of the performance of the Xbox division. Revenue and costs from the firm’s game making Studios are also concealed within the Consumer Devices Other segment.
Xbox One VS PS4 battle loses steam
Though it’s not clear how much damage dealing with the Xbox One VS PS4 battle is doing at Microsoft, it’s clear that the segment is a loser in the eyes of investors. It drags down margins across the firm, and it divides the firm’s business between software and hardware, something they’ve wanted to see a pullback on for years.
The removal of Xbox branding from marginal products like Music combined with the write down of the Nokia division begs questions about the future of the Xbox. It’s clear that Microsoft won’t be able to sell the device segment any time soon, as it’s far too reliant on Windows for operation, but it may begin to take its foot of the pedal in the Xbox One VS PS4 battle.
Sony Corp (NYSE:SNE) is already winning that fight, and the firm is likely to stay ahead if Microsoft doesn’t go on a losing streak by putting large wads of cash behind the Xbox One.
If Microsoft wants to hold a place in the living room, or in the hardware space, for the sake of it, investing in the Xbox One VS PS4 fight is a cheap way to do so. Building a new hardware brand from scratch is hard, as the firm found out with both the Surface and Windows Phone at Nokia.
Satya Nadella is on a warpath right now, and his ideas about the future of Microsoft may not use Xbox in the same way as Steve Ballmer did to drive other sales.
In an email obtained by Geekwire and published on June 26, Mr. Nadella said that gaming was part of the firm’s play for the future, but he said that the firm would bring all of its current plays, including Xbox Live, Hololens and PC gaming together into a single integrated attempt to grab the future of the market.
There is money in gaming, but Microsoft is not earning it. The Xbox One VS PS4 battle has sucked the firm’s hardware divisions dry, and Mr. Nadella needs to find a new way to approach the problem of gaming. That may mean something very different from the Xbox One arriving in the next generation that Microsoft has to offer.
While Microsoft looks at what that might be, the Xbox One VS PS4 fight will remain a sideline. It will be fought with some interest, but it won’t be the focus of Microsoft’s efforts. It won’t even be the focus of Microsoft’s efforts to secure the future of gaming as a radical solution to the problems that have plagued the firm is sought.