Monday, July 30, 2007

Microsoft's Xbox 360 Dilemma

The Wall Street Journal ran an interesting piece earlier this month, sourced from

Essentially, the article contended that Microsoft's latest troubles with its gaming unit's product should spell the end for the product group. At least under Microsoft's aegis.

I could not agree more, and have written as much last spring (2006). In this post, I suggested the following,

"My friend S, a consultant, was discussing corporate performance with me recently. While debating the recent fortunes of tech companies such as Google, Intel, and Microsoft, she challenged me to articulate what I would to fix what ails the last one. I had opined that Microsoft is, essentially, finished as a company capable of generating consistently superior returns, in part, as I have written recently, because of its chairman's excessive wealth. By the way, according to S, my estimate of Gates' net worth may have been light by as much as 50% or so. He apparently was worth some $50B as recently as 6 months ago, not the $25B I thought.

In any case, I said that the first, and, for a while, only thing I would do at Microsoft would be to essentially execute the threatened anti-trust remedy of the Netscape case- split the company into three: an applications software company, an operating systems company, and an internet-related company."

The recent Journal article also advocates spinning off Microsoft's gaming unit. It notes that the Xbox group accounts for only 10% of the company's revenues, yet has become a drain on profits, as sales of the gaming consoles have failed to meet expectations.

As I have written before, having too much financial cushion, and a complicated internal capital allocation process, tends to make units of conglomerates like Microsoft less competitive in the marketplace. They aren't as committed to "do or die" innovation and product success, because, regardless of the group's performance, they will still get paid.

Trouble is, the online gaming business is now a bare-knuckles, innovative slugfest among Nintendo, Sony and Microsoft. There's no room for a half-hearted entrant to dominate the sector.

Between the recent Xbox recall, and its already-slow sales start, I would agree that it is time for the software giant to cut this entity loose to sink or swim on its own.

It isn't doing shareholders much good, and CEO Ballmer still has his hands full with the other two major divisions- applications software and operating systems. Neither of which is yet on track to return Microsoft to its glory days of consistently superior total return performances.

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