Actually, Microsoft needs Bing and Xbox as much as it needs Windows
The spectator sport of handicapping potential Microsoft CEO candidates continues apace, with a report claiming that Stephen Elop would consider spinning off Bing and Xbox to concentrate on putting Office on iPad. That echoes claims from Nomura analyst Rick Sherlund that Microsoft is using patent licensing revenue from Android OEMs (which he guesstimates at an implausible $2 billion) to hide the cost of running the Bing and Xbox teams. His suggestion: Alan Mulally from Ford could show up as the new CEO and sell off Bing and Xbox.
There are few problems with this scenario, leaving aside the questions of whether someone as passionately committed to Microsoft as Steve Ballmer would sell off his stock the way Sherlund suggests or whether a CEO candidate currently in the middle of an acquisition deal with Microsoft would tell anyone his plans for the company before he even starts the job we know he’s getting (in Microsoft’s Devices group). Not to mention the fact that Ballmer has already committed to a version of Office for iOS once the touch-friendly version of Office come to Windows 8.1 next year, making Elop’s alleged vision rather short-sighted.
$2 billion in patent licensing is patently made-up
The first question is whether the sums add up. The $2 billion estimate is based on every Android phone sold by an OEM with a license bringing Microsoft $5 revenue. That might work for OEMs with no patents of their own, but OEMs like Samsung and HTC actually have cross-licensing deals with Microsoft that give both companies access to each other’s IP. If Microsoft wanted to put the patented Samsung “camera in every pixel” system from PixelSense (the giant table computer formerly known as Surface) into a Perceptive Pixel display, for example, a cross-licensing deal would make that possible. That makes it very unlikely that Samsung is forking over $5 a phone, for example.
Why Xbox
Are Bing and Xbox a huge financial hole in side of the Microsoft ship? There isn’t much money in making games consoles, between the cost of R&D, subsidizing the hardware, and dealing with expensive mistakes like the infamous Red Ring of Death. There’s plenty of money in having a successful game though: $220 million in the first 24 hours for Halo 4 and total revenue for the Halo franchise of some $3.4 billion. Having Halo be successful on Xbox means Microsoft can hope for a halo effect on Windows Phone and Surface with tie-in products like Spartan Assault (a tablet game) and Halo Waypoint (a companion app), and on Xbox TV, where Seven Spielberg has signed up to create an exclusive Halo TV series.
Xbox Live and Microsoft’s own games make a few pennies as well: $1.64 billion in the latest quarter. That’s 17% more than the same time the previous year, and Xbox Live transactions (like buying songs and renting videos) is up 25%. Want to reach women? Ignore the stereotypes — 40% of regular Xbox 360 users are female.
So Xbox the platform might look rocky, but Xbox the platform and Xbox the service look more promising, especially as the PC becomes less prominent. The content we’ve been enjoying on our PCs is moving to the living room. If Microsoft doesn’t want to give up the living room to tablets and Apple’s AirPlay and Google’s Chromecast, it needs Xbox.
Plus, Xbox brings Microsoft other significant advantages beyond a potentially huge entertainment platform. You could argue that Xbox is one of the things that taught Microsoft how to do cloud properly; running the Xbox Live service and the server that multiplayer gaming runs on are as demanding as anything an enterprise could want. More so perhaps; if your database report runs slowly, you can go and get a cup of coffee but if your ammo doesn’t reload when you power up, you’re dead. Handling live chat for millions of gamers at once? Good practice for building cloud services like Lync Online that offer unified communications for businesses. And running the Halo leaderboards and avatar rendering on Azure is a good way to make sure Azure can cope with workloads beyond Windows Server virtual machines.
Halo was one of the earliest customers for the HDInsight big data service that runs on Hadoop clusters on Azure. They used it to find players who were cheating in the Halo 4 Infinity Challenge, and to send custom marketing email to legitimate players to keep them interested. The mail you get depends on your gaming style as well as how long you’ve been playing, so you don’t get annoyed by tips on completing a mission you ran weeks ago. The Halo analysis team isn’t just a great case study for Azure; they were a great chance to test the new service at scale.
But most importantly, Microsoft needs Xbox because it needs to stay in the consumer market. Enterprise is where Microsoft makes a lot of its money, but the 2 million Office 365 Home Premium subscribers who signed up in the first nine months show there’s a market beyond the office. And if you want to stay successful in the enterprise market, you have to understand consumers — or “people” as Microsoft would prefer to call them.
Tablet and smartphone users. People who jump on Twitter to talk about work. Office workers who will put a Salesforce subscription on their company credit card or put their files on Dropbox to share if it helps them get their job done. When they show up to work, people are bringing in their technology habits and preferences along with their tablets. If they’re used to using Outlook.com and Bing on Xbox and snapping Skype next to Halo on their Xbox screen, they’re going to be comfortable with the interface in Power BI and SharePoint Online, and with snapping apps side by side on a Surface tablet.
And if they don’t like any of those services, at home or at work, they’ll stop using them. So if you want people to use your enterprise tools, you have to appeal to them as consumers — so you have to understand how to make an appealing consumer service. Xbox is a great opportunity to do that.
Bing is even more imoprtant
Bing is even more important to the company, and far more closely entwined. Elop will know that as well as anyone from Nokia’s work with the Windows Phone team. Bing isn’t just the search engine on the phone, for everything from recognizing music to translating foreign languages right inside the camera to powering voice recognition. Even though it uses map and address information from Nokia’s HERE maps, that’s delivered by Bing’s system for understanding what information is about, called Satori.
Satori is a huge collection of entities: People, places, events, businesses, objects and the relationships between them. A movie is an entity; so is are the actors who are in the movie, so you can see that James Spader was in Stargate, and then jump to a list of his other movies. Bing knows that Yosemite is a place, so it has weather, and a national park, so it has opening times. Satori is what Bing can use to find tweets and Facebook posts from your friends about the movie you’re searching for when you look at show times. If you want to show the right information to the right person at the right time, understanding that information is vital.
Satori and Bing are behind the new Smart Search in Windows 8.1 that shows you your own files next to results from the Web. Looking for the contract you need to sign this week with a partner might be a good time to see their share price and any recent news stories about them. Imagine all the other information that could include in future; search for the document you need on SharePoint and see what colleagues have said about it on Yammer without having to remember to go look on Yammer.
Bing drives the new version of the Windows Store in Windows 8.1. The custom list of apps labelle Picks for You? Bing powers that, crunching the big data gathered about what apps are popular and how that matches what you download and install. Even the lists of new apps in each category are filtered by Bing in an attempt to pick out what’s novel instead of what’s just arrived.
At heart, Bing (like Google) is a huge machine learning system. The excellent touch keyboard in Windows Phone that accurately predicts what word you’re typing, what word you’re going to type after that and even which key you’re about to try to type so it can make the touch target bigger so you actually hit it, is based on machine learning work at Microsoft Research. MSR’s machine learning is what lets Kinect understand when you’re raising your arm and when you’re just moving sideways. It’s what makes Xbox voice recognition accurate enough to pick out the names of TV shows and movies when you search for them. And the reason MSR has that expertise in machine learning, and Microsoft has the expertise to build the cloud systems that can power those systems, is that it needed to develop them to run Bing.
Chasing Google on search ad revenue is probably a losing game, even if Bing did increase search advertising revenue by 47% and crank its US market share up to 18%. Google dominates the market and mindshare, to the point that people say the same results are more relevant if they’re labeled as coming from Google rather than from Bing. But even if Bing never made Microsoft another cent in search, it would still be far too important to the company to sell off to Yahoo or Facebook.
