Here's why Xbox is key to Microsoft: It kills Apple and Google in the living room

There have been increasing calls for Microsoft to sell off its Xbox division, but selling it would be a big mistake. Here's why: It slaughters Apple and Google in the living room.

The latest generation of Xbox, the Xbox One, is due out this month, and it will certainly be a very big seller. It's going head to head with Sony's PlayStation 4. Estimates are that each will sell between five million and six million units.

If you think of the Xbox One as only a game machine, then it might make sense for Microsoft to sell it off. Nomura Equity Research analyst Rick Sherlund has, for quite some time, argued that Microsoft should sell off Xbox as well its money-losing Bing search engine. Sherlund believes that if Microsoft sold Xbox and Bing, and took cost-cutting moves, it would increase Microsoft's fiscal 2015 earnings by 40 percent.

Many people, including Sherlund, say that Microsoft needs to focus on its core business, and that gaming isn't part of its core business. In fact, reports say that Microsoft CEO candidate Stephen Elop would consider selling off Xbox if he took over as CEO.

What people don't realize, though, is that the Xbox is far more than a gaming system, and is vital to Microsoft's future. That's because of the nature of the current battle among Microsoft, Apple, and Google. The fight is one over entire ecosystems of services and media content, not just hardware and software. And that's where Xbox gives Microsoft an advantage over its competitors.

The Xbox is key to Microsoft winning the fight over entertainment. It may look like a gaming system, but it's really an entertainment-delivery system, and it beats anything that Apple or Google have. Apple TV is a bust, as is Google TV. Chromecast is a nice little gadget, but that's all it is. It's far from the centerpiece of an ecosystem.

The Xbox One is the centerpiece of an ecosystem that includes Web content, movies, TV, games and music. And clearly beats anything that Google or Apple have. And it's not just me saying that. In a note to investors, Robert W. Baird analyst Colin Sebastian wrote that the Xbox beats both Apple's and Google's offerings. Gamespot quotes him as saying in the note:

"Overall, we were impressed with the platform and believe that Microsoft has largely achieved its goal of creating a compelling living room entertainment hub. Games we saw show improvements in graphics and performance over current generation, and multi-media capabilities that keep Microsoft ahead of Google and Apple (for now) in the living room with the integration of console quality gaming, web content, and traditional media."

That's why selling the Xbox would be shortsighted. It may fatten Microsoft's  bottom line in the short term. But in the long-term it would seriously hurt Microsoft.

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