Why Microsoft should spin off Xbox

While from a purely financial perspective Microsoft is a healthy company, there’s no doubt that their long term prospects are questionable. Steve Ballmer was replaced as CEO by Satya Nadella, who has since announced layoffs and a new corporate strategy. Microsoft, like many large corporations, has lost its focus. Microsoft at its very core is a software company, and its best bet to right the ship is what Nadella has laid out: productivity & cloud enterprise offerings. The company has gotten distracted by chasing Apple, who is in an entirely different business. For Apple, software is a differentiator, rather than a driving revenue source. Microsoft, bluntly put, is not a consumer company.

Every consumer facing effort Microsoft has introduced has been an absolute failure: Bing, Microsoft retail stores, Zune, Surface, etc.

The strongest reason Microsoft should spin off Xbox is a direct result of this: consumers have no brand loyalty whatsoever to Microsoft. If anything, Microsoft’s brand value amongst customers is negative. It’s a company in long, slow decline from its heyday. There’s no doubt that Microsoft still offers compelling solutions, but few (if any) of them are consumer facing.

This is especially true amongst millennials, who overwhelmingly prefer Apple products and have no loyalty whatsoever to the Windows/Office dominance of yesteryear. Xbox is a brand that maintains recognition amongst millennials, and offers a strong experience to its core market. This makes Xbox a perfect candidate to spin off, along with the rest of Microsoft’s hardware efforts (I would define this as Nokia, Windows, and Surface). It also doesn’t fit in with the rest of Microsoft’s stated productivity/cloud corporate strategy.

From a product strategy perspective, spinning off the above mentioned units would free them up to truly compete instead of being hitched to the rest of Microsoft. Xbox wouldn’t be tied to Live or Windows or any other efforts. The goal of the new Xbox unit would be purely to create the best hardcore gaming machine on the planet and sell as many of them as possible. This is like Roku or an business with a hardware model: they are incentivized to hook into many services to provide as much content as possible to users. This would allow Microsoft to achieve its intended strategy, which in Satya Nadella’s own words consists of:

“letting people access applications anywhere, from any device, regardless of the device type or form factor” — WSJ

Microsoft would also be able to confront the reality that is the mobile market. Nokia was, by all accounts, a horrible purchase. Not only that, but it will be a money drain on Microsoft profits for years to come. Better to spin it off into the new hardware unit and let them figure it out (and squeeze the last benefits out of the Nokia brand name). To put into perspective how badly off Microsoft is in the mobile market:

https://twitter.com/asymco/status/519306609332596737

Windows and Surface suffer from the same problems, except they face the added burden of supporting legacy applications. Office fits in well with the new Microsoft; an operating system and tablet/PC combos do not. Microsoft’s solution of making Windows run everywhere and redesigning it (then redesigning it again) haven’t slowed PC sales, and never will.

Ideally there would be two new spinoff companies: one called Xbox that focused entirely on gaming, and one called Nokia (or Windows) that developed devices that run Windows. Microsoft itself could focus on its strengths going forward: the cloud, enterprise services, and Office 365.

This would give each company the chance to focus on their core market, and return some of the focus that Microsoft is sorely missing. If they don’t act quickly, the company won’t fail overnight; it’s far too large to disappear that fast. As we’ve seen this week with HP, the other option is to fade from a once great company into irrelevancy, and save the split until its far too late.