Microsoft Should Spin Off Xbox Console Business - Analyst

Goldman Sachs Proposes to Split Up Microsoft

by Anton Shilov
10/05/2010 | 10:58 PM

Analysts from Goldman Sachs investment firm said that Microsoft Corp. should spin off its consumer Xbox business as potentially lower than expected software sales lock potentially high financial performance of consumer businesses. The proposal hardly makes a lot of sense due to many reasons, among which is natural dependence of console hardware business on financial potential of its owner.

 

"A break-up of the consumer businesses could potentially unlock hidden value, or more discipline on cost could turn the businesses into contributors to profitability and shareholder value. For example, the Xbox products could be an appealing stand-alone entity, given the historical success of the Xbox and the products’ brand strength, and the business could show unlocked value with forced cost discipline compared to as a piece of Microsoft," a recent report from Goldman Sachs reads, reports TechFlash web-site.

But while Xbox business is not profitable, it should be noted that Microsoft had to invest heavily into design of the console and sell it at a loss for a long period of time, at least initially. A small company cannot afford selling hardware at a loss for prolonged time, which is why firms like 3DO, Sega and many others had to quit hardware business. For the Xbox division Microsoft's financial capabilities is the base of long-term success and spinning off the Xbox business may undermine its future development.

But Goldman Sachs seems to believe that Microsoft should completely split up itself into at least two separate companies, one of which would serve enterprise and business customers and another working on the consumer market.

"To date the company’s comments suggest that management still sees significant value in combining the consumer and enterprise efforts, but we view a foot in both camps as preventing a successful focus on one strategy, a la Oracle in the enterprise or Apple for consumers," said Sarah Friar of Goldman in the report.

At present Microsoft is at risk given the turmoil on the market, uncertain sales of its software on emerging markets and other factors. However, what should be kept in mind is that Microsoft Windows is used by both consumers and businesses whereas companies like Apple or Oracle have rather very distinct clients.

"We believe the intrinsic value of shares cannot be unlocked if the status quo remains, and we have increased caution near term on a more elongated PC refresh cycle, combined with the newer threat of notebook cannibalization from tablets, where Windows does not yet have a presence," write Goldman Sachs analyst Sarah Friar and associates in the introduction to the report.