A story published by Bloomberg floats the idea that Microsoft might spin off its Xbox business, which it calls “more likely [following current CEO Steve Ballmer's] exit.” The publication values Xbox at around $17 billion, a figure based on a comparative revenue multiple with Nintendo.
This is precisely the sort of bilge that cavorts and pretends to be serious analysis. The Bloomberg piece leans on the words of a fund manager, Todd Lowenstein, who claims that Xbox “looks like an attractive standalone business that could hold up on its own.” He continues that it “seems like it would be the most mature candidate with the best growth potential and the most established to stand on its own.”
You could argue that Xbox is currently undervalued inside of Microsoft. However, that potential is not exactly material. Presuming for the moment that the $17 billion figure is reasonable, Xbox as a group would represent 6.1 percent of Microsoft’s current market capitalization, a slim segment.
Presuming a 50 percent lower market valuation while under the aegis of the larger Microsoft corporation (the tax of being part of Microsoft, the value that could be unlocked), Xbox could represent $8.5 billion in lost value to investors. That’s about 3 percent of Microsoft’s worth. So, the potential upside isn’t too great.
The potential downside, however, is hilariously large.
Key Platform Plank vs. Un-Lucrative Short-Term Financial Ploy
Microsoft could spin off Xbox, reap a short-term financial gain from the transaction, and return that money to shareholders via stock buybacks or a special dividend. The former would have a small, but real long-term impact on Microsoft’s earnings per share, perhaps leading to a higher per-share value in the future. The latter would be a waste, as a previous Microsoft special dividend demonstrated.
So, Microsoft would gain little from the deal as a company, even though institutional investors might enjoy a special dividend boosting their quarterly numbers. That’s nice, but not what Microsoft lives to do. In fact, Microsoft’s job is not to worry about the spreadsheets of external financial entities, but instead to build great products, grow new platforms, make oodles of money, and take care of its employees as it does so.
Therefore, the short-term potential financial gain is not core to what Microsoft needs to worry itself with.
Does the idea of spinning off Xbox make product sense? No it does not. At all. Microsoft is working around the clock to expand the Windows platform to every screen that you view, from the desktop, to your laptop, tablet, phone and, you guessed it, your television.
Windows on my TV, you might think, I don’t want that! Chill fam, it’s fine. What Microsoft is up to is simple: A common set of APIs and foundational code called the Shared Windows Core will underpin all Microsoft platforms. It’s in Windows 8, and Windows Phone 8, and is also present in the forthcoming Xbox One.
As the traditional PC market declines, Microsoft is endeavoring to extend its Windows software to work everywhere. And Xbox is core piece to this gambit, which is a bet that developers matter, and that as a company Microsoft needs to cater to them.
Essentially, Microsoft wants to create a single mega platform, one in which any developer with a shared code base can reach consumers and companies on screens of every size: Tablet, phone, laptop, desktop, and TV. No company offers that, and HTML5 is far from reaching the point in which it can deliver anything similar.
Now, why does Xbox matter for Microsoft? It matters as it has high levels of developer support at the Triple A tier – think ‘Gears of War’ and that sort of game. Xbox has a subscription revenue system that is a key part, and has been a critical antecedent to its new services strategy. And, finally, Xbox allows Microsoft to offer music and video to a family across quite literally all their devices.
If Microsoft were to sell off or spin off or otherwise cut ties with Xbox, which, by the way, makes utterly no sense under the current reorganized structure — it would cede the living room to third parties. The company is not willing to do that. Just as it was not willing to fail in search, or mobile.
So the financial upside of the deal isn’t large enough for Microsoft to particularly care, especially given its ample — if mostly foreign — cash reserves. And the exit of Xbox would tear at the fabric of its company-wide plan to unite all screens under the Windows flag.
Sacrifice the end-game of Windows for the potential of a few billion in shareholder equity? No.
Top Image Credit: Marco Verch