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Daily Reaction: Potential Microsoft CEO Considers Xbox Sell Off

November 8, 2013Written by Dan Oravasaari

Hold me Stephen

With Microsoft still looking for someone to take over the reigns from current Microsoft CEO, Steve Ballmer, Ex-CEO of Nokia and candidate for the position, Stephen Elop said that he would consider selling off the Xbox gaming division. As is to be expected, the internet blew up and so the Daily Reaction crew of Sebastian Moss and Dan Oravasaari are here to answer a few questions about what all of this means, and how it could affect the games industry.

As stated on Bloomberg:

Besides emphasizing Office, Elop would be prepared to sell or shut down major businesses to sharpen the company’s focus, the people said. He would consider ending Microsoft’s costly effort to take on Google with its Bing search engine, and would also consider selling healthy businesses such as the Xbox game console if he determined they weren’t critical to the company’s strategy, the people said.

1. Should Microsoft Sell Xbox?

Dan: Well, let me start off by stating something that should be obvious, Elop is not currently the CEO of Microsoft, and he only said that he would ‘consider’ selling Xbox if it wasn’t critical for the company’s strategy. This means that this is little more than a potential strategy for the company and only if the cards were right, would they sell off the brand.

The real news has been the fact that according to Rick Sherlund, an analyst for the Nomura Group, he states that he believes that the Xbox has been a huge financial burden for Microsoft and has been costing them billions.

We conclude that 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…

Given that a great deal of money has to have been spent on R&D and patents, there could be hope in that the losses will eventually subside, but given the current status of the Xbox One, it would be hard to see it make up such a major deficit. This leaves another issue, in that, if the Xbox One doesn’t gain enough market share to be profitable, who would buy it and how much of a loss would MS be willing to take on it? Those factors alone make me believe that they wouldn’t drop the brand, or sell it, but drastically lower operating costs by any and all means – even if it means closing some studios down.

Seb: It’s crazy to think this is something that could actually happen. Stephen Elop is believed to be in the final four candidates in the running to take over, and of those four he is the one with the most experience running a large company.

Elop apparently wishes to shift the company’s focus to software and digital only, in the form of Office software and selling content on iPhones and Android. If Elop, or any other new CEO believes that software and digital – Microsoft’s most profitable regions by far – are the way forward for the company, then it’s only reasonable for them to cut all of their unprofitable and risky hardware branches, notably the Xbox division that has routinely made huge losses and rarely a profit. The Xbox division also employs a significant workforce, and one of the quickest ways to cut costs is cut staff.

Even large companies have problems diversifying (just look at Sony), so there’s a lot of rationale behind just focusing on one area, but at the same time, the value of Xbox shouldn’t be denied – it’s a huge brand that brings in billions, and the ecosystem of Xbox Live is incredibly large, and filled with paying customers.

Xbox does need reevaluation, and it’s just a question of whether the new CEO will keep Xbox, or try to sell it to a very small group of companies.

2. What would Happen to the games industry?

Seb: This really depends on who buys it, and when. At the moment, most things in the Xbox One’s 2-3 year future are already locked down, so you wouldn’t see an immediate change to a lot of things. What would be most interesting would be whether the new owner keeps the connections to all of the other Microsoft services, or if they integrate their own ecosystem. It’s also unlikely that the new Xbox would be treated to as large of a marketing budget, as that’s a Microsoft hallmark.

As for the industry itself, it’d be a period of great tension and uncertainty. Every Microsoft Games Studio would be up for review, every third party deal, every developer relation would be at risk. And that could go either way – more investment, or radical downgrading. Sadly, considering Xbox runs at a loss, it’s more likely we’d see cuts.

Dan: Yeah, sadly none of this would be good for the industry as a whole, the loss of the Xbox brand as we know it could mean a giant loss for countless developers, first, second and third party. If we equate that roughly 50% of the console market is sold on an Xbox, any loss of the status-quo would have drastic ramifications that would force studios not able to weather the storm to close.

Thankfully, we are seeing a giant spurt of the indie scene and they have yet to become as reliant on the console market for sustainability, so any loss there could be mitigated.

Hopefully, if this possibility does come to light, MS does not simply piece meal their studios like we saw with THQ, but finds someone willing to just take the reigns. But, ultimately, I still don’t see the feasibility of MS unloading the Xbox anytime soon, so I won’t stress about it too much, and neither should you.

3. Who would you want to see pick up the brand?

Dan: Honestly, the first names that come to mind are Apple and Amazon, as they all have been either rumored to be, or are confirmed to be entering the games market in some form. The real issue would be, as I said, if the XBO isn’t profitable, hence why it would be sold off, who’s going to buy it?

Given the new direction for the XBO, and the number of patents that are already existing in it, I don’t see a tech company like Apple bothering to deal with technology from another company. Instead, much like we have been seeing and hearing rumors about, the possibility of a smaller PC centric device, that uses proprietary tech would make more sense. This would leave a company like Amazon, but it seems like entering the console space isn’t a priority for them.

What this means, is that there would be one of two options, either Xbox is bought out by a random investor, like the one who bought OnLive, or sold off in pieces. Either way, neither of these would be optimal for the brand or the industry, so I hope MS holds onto the Xbox and turns things around if the operating loss is true.

Seb: There aren’t many companies that would even consider buying Xbox, but one of the likeliest candidates is Samsung – they have the money, the desire to build a massive ecosystem, and the lack of a significant presence in the games industry.

I doubt Apple would buy Xbox, and I’d hate it if they did. Their ideology just doesn’t mesh with that of the Xbox brand, and they’d probably end up closing down a bunch of studios.

Finally, with any bold tech move discussion, there’s always Google. Google are desperate for a larger and more connected ecosystem, especially one that includes paying customers, and they’re also eager to increase their hardware production and get deeper into the entertainment business.

Sadly, whoever buys them will likely face huge issues stemming from a clash of corporate cultures, something that Sony struggled with when they formed Sony Computer Entertainment. The results of an Xbox buyout could be fantastic, but they probably won’t be.

Do you think Microsoft should sell off the Xbox? What would happen if they did? And who do you think would pick it up? Let us know in the comments below, email us at [email protected] or sell us something you just spent billions on at Seb and Dan.