Stock analysts and even a potential CEO candidate are calling for Microsoft to sell off Bing and its XBox division, but Steve Ballmer, in his final speech to company shareholders, makes it plain: He believes both are core to Microsoft's success. Is he clinging to yesterday's vision, or is he on target?
The calls for Microsoft to sell Bing and Xbox have been going on for some time. Most vocal of those calling for the sale is Nomura Equity Research analyst Rick Sherlund. Sherlund says that if the company sold Xbox and Bing, and also cut costs, it would increase Microsoft's fiscal 2015 earnings by 40 percent. Earlier this year, Sherlund wrote:
"While we like Bing as a service, we need to look at this from an ROI and strategic perspective. If Microsoft could sell or even give Bing to Facebook or Yahoo and eliminate its operating costs and get a Traffic Acquisition Cost (TAC) back to monetize the traffic that Windows/Internet Explorer or Xbox in the living room can drive to Bing, this might generate perhaps $1.0bn of profit and positive FCF rather than be a drag of a similar magnitude. If this were returned to shareholders, this could add nearly 1% incremental to the dividend yield, in our estimation."
One-time Nokia CEO and Microsoft CEO candidate Stephen Elop has said that if he were made CEO, he'd consider selling them off. Bloomberg reports that "three people with knowledge of his thinking" say that Elop:
"Would be prepared to sell or shut down major businesses to sharpen the company’s focus...He would consider ending Microsoft’s costly effort to take on Google with its Bing search engine, and would also consider selling healthy businesses such as the Xbox game console if he determined they weren’t critical to the company’s strategy."
Ballmer, though, disagrees -- and vehemently. So much so that he took the occasion of his final speech to Microsoft shareholders to talk about how important Bing and Xbox were to Microsoft. GeekWire reports that Ballmer "called out those divisions as key parts of Microsoft’s broader vision."
The Xbox One, he said, is the fruit of Microsoft's strategy to unify devices and services, and called Xbox One "a reflection of what is possible when a company, our company, is unified under a common vision." As for Bing, he points out that it's more than just a search engine, and is a vital part of Microsoft's improving its Windows Azure cloud platform.
I generally dont' agree with everything that Ballmer says -- in fact, I disagree with a lot of what he says -- but he's right about this one. Xbox is more than just a gaming system. It's the key component of Microsoft's push into entertainment and beyond. Apple, Google, and Microsoft are battling over entire ecosystems of services and media content, not just pieces of hardware and software. Xbox gives Microsoft a leg up on both Apple and Google there, because neither company has a competitor to it, and the Xbox delivers a wide variety of content and services, not just games.
Robert W. Baird analyst Colin Sebastian agrees, and according to Gamespot wrote recently that:
"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."
As for Bing, as Ballmer said, it's more than just a search engine, and is key to many other Microsoft products and services. Azure is one of them. So is Windows itself, because Bing powers a new category of Windows 8 apps that deliver fast-changing information and multimedia from the Web. Bing is also central to Microsoft's strategy for making money in mobile search.
If you think only about short-term stock prices, then Nomura is right. But there are more important things than short-term stock prices, notably the long-term health of a company. And for that, Ballmer is right: Microsoft needs Xbox and Bing.