Why Microsoft won't sell off Bing or Xbox

Why Microsoft won't sell off Bing or Xbox

Summary: A new Nomura Research report calls for Microsoft to get rid of Bing and/or Xbox in the name of maximizing shareholder value. Here's why I'm doubtful either move will happen.

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Influential and long-time Microsoft analyst Rick Sherlund argued in a May 28 research report that it's time for Microsoft to get rid of Bing and/or Xbox.

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The title of Sherlund's note -- "Pressure Building to Realize Greater Shareholder Value" -- makes it plain where he's coming from.

"We think there are a number of things that could be done to improve the return of cash to shareholders and improve the profitability and cash flow of the business," Sherlund, an analyst with Nomura Research, said in the note. He added, "We think there is likely to be a more substantive catalyst for change than we have seen previously in the history of the company, and there may be a more receptive group of frustrated shareholders to leverage in an effort to drive greater realization of shareholder value at Microsoft."

(The latter sentence refers largely to a recent purchase of one percent of Microsoft shares by ValueAct Capital, which recently disclosed a 1 percent position in the company. By Sherlund's calculations, this could make Value Act the 17th or so largest shareholder in Mirosoft. Chairman Gates owns 4.8 percent of the company's stock and CEO Steve Ballmer owns another 4 percent "and tends not to sell," Sherlund said.)

Sherlund called for Microsoft selling or even just "giving" Bing to Yahoo or Facebook to eliminate its operating costs and monetize traffic that its products and services can drive to Bing. He said Microsoft could derive more value from Xbox by selling it to a consumer electronics company like Samsung or at least spinning it out as a separate company. And he threw in for good measure that it's high time for Microsoft to release Office for non-Microsoft platforms like Android and iOS and generate profit from its office-suite franchise.

While reading Sherlund's note, I kept chanting "devices, devices, devices" (and "services, services, services") in my best Ballmer impression.

Microsoft is in the midst of trying to remake itself into a devices and services company, as we've all heard by now. Xbox -- along with Surfaces, Perceptive Pixel displays, and Windows Phones -- are the "devices" here, as are the tablets, PCs, phones and other tables, PCs, tablets, embedded devices and other third-party products running some variant of Windows. Non-Windows devices also are endpoints in the new Microsoft world. The Office team is believed to be readying Office for iPad and Android, maybe sooner than the second-half 2014 date I saw on a Microsoft roadmap.

Bing, as I noted just last week, is not so much a Web search engine as a service that Microsoft is integrating into just about all of its software and hardware these days. Despite the doubters inside and outside the company, Ballmer has remained (outwardly, at least) bullish about Bing.

Wall Street has been after Microsoft to dump Bing, which is still in the red, for years. And more than a few financial analysts have been calling for Microsoft to split itself into multiple companies for just about as long.

Ballmer has said repeatedly that the whole "consumerization of IT" trend shows that it's not so easy to simply break the company along the consumer/enterprsie fault line. He's also been trying for years to insure the company hedges its bets with investments beyond its core Windows/Office products by giving possible new cash cows a decade or so to come into their own.

I'm not saying I think it would be impossible for Microsoft to sell off Bing or Xbox. But I think it's highly unlikely. In my view, it' far more likely we'll see Microsoft reorg in a way that reflects its new devices/services aspirations than it is that we'll see the company sell off any of its piece parts.

What's your take?

Topics: Microsoft, Collaboration, Tablets, PCs

About

Mary Jo has covered the tech industry for 30 years for a variety of publications and Web sites, and is a frequent guest on radio, TV and podcasts, speaking about all things Microsoft-related. She is the author of Microsoft 2.0: How Microsoft plans to stay relevant in the post-Gates era (John Wiley & Sons, 2008).

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86 comments
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  • It's about the ecosystem

    MS won't sell off Bing or the Xbox because that would hurt their ecosystem. They are bringing their user experiences together and building on them right now. Using the Xbox interface makes the Windows 8 interface more familiar which makes WP 8 more familiar. All of that helps to drive sales because people buy what they're familiar with.

    Bing is a search tool that integrates into all of MS devices and services (or soon will I bet) and helps keep the user interface consistent. Making a profit here is not as important as building the ecosystem.

    There are three major ecosystems - Apple, MS, and Google. Apple is a walled garden and is working to kick out non-Apple services (Apple Maps, iCloud, etc.). Google started out open but is busily putting up walls of their own. MS is doing the same. Why? Because there's more money to made overall in a walled garden. Relying on third parties for necessary functionality merely gives people an easier time jumping ship.
    kiz
    • I don't think that Microsoft is very walled, hopefully it stays more open

      They don't have a book platform, but you can access Kindle & Nook in the Windows 8 store (and on the phone) as well as other book platforms. With access to Netflix, Hulu, Amazon Video, as well as Microsoft's Xbox Video, the Xbox has great access to video content from multiple providers (other providers are also available and both Windows 8 and Windows Phone 8 have access to most of these as well).
      grayknight
      • Rick Sherlund just cratered Nomura Research's credibility

        Bing is now core to Windows, Office, Windows Phone, and Xbox. Casting it off would cripple all of those. He's smart enough to know this so I'm left wondering what's going on behind the scenes at Nomura.
        Johnny Vegas
    • Both Bing and Xbox have value, for different reasons.

      Bing has been a financial hardship out of necessity. Microsoft does not (for good reason) what to make Google money every time anyone uses the default search engine. Bing has cost money, but when compared to Apple (which make Google a tremendous amount of money) they at least have an alternative to Google search (which is much better than Apple maps to Google Maps).
      Xbox is one of the few parts of Microsoft that is showing increase in profits and users year over year. Getting rid of Xbox would be Microsoft giving up. Why would they for a second consider that? With Office and Windows OS slowing Xbox is necessary for Microsoft's future.

      On a side note saying that Google is putting up walls with their open source OS's and software is foolish. Their services on the other hand are theirs and they should be able to put whatever walls they want to on them (part of being the software developer). You can't put up walls with open source software, because anyone can modify the source code and make their own branch without walls.
      alex_darkness
      • Windows has collapsed during the last six years...

        2007: Over 90% of new devices were using Windows operation system

        2013 (Q1): Hardly 17% of new devices were using Windows operation system.

        smartphones: 216.3 million sold, 162.5 million (75,6%) were using Android Linux, Windows 3,2%
        tablets: 49.2 million sold, 27.8 million (56,6%) were using Android Linux, Windows 3,7%
        pc: 75-80 million sold, 28-30 million were using Windows 8, at least 10 million were not any kind of Windows.

        Windows 8/Windows Phoney = total 37-39 million (11-12%, rest 5-7% Windows 7 or pirates)
        Android Linux = over 190 million devices (55-56%)

        Evolution of IT:

        Linux = Modern Human
        Windows = Neanderthal
        Napoleon XIV
        • jaja

          I see that you did there!
          JuanCruzArg
        • You know what's pathetic?

          Choosing something based on how many people use it.
          Michael Alan Goff
          • For computing devices

            There does need to be some critical mass, or there are no apps.
            Mac_PC_FenceSitter
          • And apps are everything!

            I mean, Linux has almost no marketshare on the desktop so it's impossible to get work done. Same with OS X.

            /s
            Michael Alan Goff
          • I get lots of work done on Linux

            You don't use the same gang of proprietary apps available on the Windows side, but replacements are readily available.
            John L. Ries
          • ROTFL...

            @MichaelAlanGroff: I am guessing with your /s you are meaning sarcasm. So to give your comment a real use case. I am right now typing this on a virtual machine that is running Linux, on a Linux Server, with OSX as my client. My point is that I have now lived about 2 years without Windows! OSX and Linux only on the desktop, and it works WONDERS!

            Do I miss my office? Ironically, no! I don't use it that much anymore, and use OpenOffice in its place.
            serpentmage
          • Yep

            The /s is for /sarcasm.

            :D
            Michael Alan Goff
          • But as long that critical mass is reached...

            ...market share doesn't really matter.
            John L. Ries
        • Not the greatest example

          Modern humans (except Africans) are 4% Neanderthal.
          Mac_PC_FenceSitter
        • wow...such ignorance

          You will be LONG dead in an unkempt paupers grave before Linux matters at ALL to real computers. I knw that your life is so pathetic that you have been singin 200X is the year of Linux! all the way up to 2013...but it is not happening.

          Just a thought...for REAL computers (and no one is doing real work solely on mobile devices) more people have started using a Windows device just since the beginning of summer than have EVER used a Linux OS for a computer. Ever.

          Remember this until the day you kill yourself out of loneliness...you using Linux doesn't make you in ANY way more modern. Just a lonely, pathetic virgin who will die alone on Suicide Day for you.
          jkfan87
      • Why would you sell divisions increasing in value?

        Bing still has an operating loss, but it's profitability is increasing linearly each quarter. Bing is about to start becoming a profitable business probably this next year.

        Xbox also is increasing in value exponentially each generation. Higher tier Xbox Live subscription services fueled by premium TV content and an enhanced Kinect sensor that opens up unique advertising possibilities present an opportunity to increase profitability for the division. The sale of Windows app store gift cards at retail increases consumer appeal by tying the Windows and Xbox accounts to a shared ecosystem where purchases of media carries over from Xbox to PC.

        Finally the combination of Bing voice search with Xbox One, a closed platform box expected to sell upwards of 100M units, increases consumer usage and awareness of Bing. The success of the two operations are tied to one another. Bing as a service on Xbox catalogs and searches video, music, and TV content across all apps on the Xbox Live service.
        cool8man
        • Because...

          ...people will pay more for growing businesses than for shrinking ones.
          John L. Ries
        • And this is why techies don't make money on the stock market!

          I read the Nomura notes and have to say I completely agree with him. The idea that you use applications to gain marketshare makes sense. The idea that you will not be profitable right away, makes sense. The idea like Ballmer where you keep pouring money into things that don't make money, but are "necessary" is lunacy.

          I have made the following argument very often, (as has the Nomura analyst), where Microsoft is being dragged down by the yolk of Windows. Why is there no Office on iOS or Android? Because they want to use that as leverage against them. The problem is that this strategy works so long as people rely on Office. If a better or just as good solution comes along then Microsoft is screwed as they have just lost their clients. Another question, why is SQL Server, and Exchange Windows only? Again the yolk of Windows.

          This is the core of the problem with Microsoft. Microsoft is closing itself off because its flagship software is failing. This is a dying company folks. In ten years Microsoft IMO will go the way of Wang Computers.
          serpentmage
          • You mean "yoke", right?

            By saying "yolk", you have egg all over your face.
            jaykayess
    • Re: It's about the ecosystem

      No, it's all about the EMPIRE. None of those different products is offering each other much synergy right now. The star of the show used to be Windows+Office, but even that is now waning.

      If Microsoft Office, for example, were to be split off into its own company, with a mandate to port it to every platform that makes business sense--Android, IOS etc, not just Windows--just think how much more profitable it could be. Right now it's just being used as a weapon to prop up Microsoft's hegemony, and that is suffocating it.
      ldo17