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Does Microsoft Even Need Xbox?

By Ryan Nakashima

Microsoft Chairman Bill Gates donned a cool leather jacket when he first introduced the Xbox onstage in 2000. More than a decade later, the video game console is still the hippest brand in Microsoft’s portfolio. But as the company begins selling its first new Xbox in eight years, some critics say Microsoft should spin the gaming unit off. They argue that Xbox distracts management from the company’s fast-growing cloud computing business and its effort to catch up to rivals in tablet and smartphone sales. Here are Xbox’s pros and cons:

PRO
It is profitable in the long term: The Xbox business has been profitable for the past few years, according to Yusuf Mehdi, Microsoft’s vice president of strategy. Mehdi says the company sees the gaming industry growing from an annual $66 billion to $78 billion in 2017. And Microsoft hopes to broaden the Xbox’s appeal with features that make it more of an entertainment hub.

CON
It will be a short-term profit drag: Nomura analyst Rick Sherlund estimates that the Xbox platform will lose at least $1 billion for Microsoft in 2014 and may not be profitable for another year or so after that. He says a spinoff, even to existing shareholders, would immediately boost Microsoft’s profits and stock price.

PRO
It’s audience is huge: The Xbox Live online gaming and entertainment service has some 48 million members worldwide, many of whom pay $5 a month. More than 80 million Xbox 360s have been sold worldwide, providing a user base for Microsoft to sell things like music subscriptions, video rentals, more games and the new Xbox One. The platform is also a window into Microsoft services such as Bing search, Skype Internet calls and SkyDrive cloud storage.

CON
But it’s not as big as Windows: More than a billion people worldwide use Windows personal computers, and focusing efforts on polishing Windows 8.1 could have a bigger payoff.

PRO
It positions Microsoft in the living room: Microsoft’s Xbox 360 and Sony’s PlayStation 3 each sold more than 80 million units globally. Strategically, pulling even with the game console leader was a key win because it prevented Sony from taking over the living room.

CON
But the world’s gone mobile: By pouring time and energy into a home-bound console, Microsoft largely missed the mobile devices revolution. IHS predicts Microsoft’s Windows platform will be the operating system in just 6.5 percent of tablets and 3.9 percent of smartphones sold worldwide this year. Together those devices will account for 1.2 billion units sold. Sherlund says dominating the living room “was a good idea 10 years ago.”

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