For much of this year, each new week has brought with it a new impetus for a rash of articles on Microsoft’s Xbox misfortunes. From deep wounds like layoffs and project cancellations, to stinging papercuts like internal memos, poorly received public statements, or unflattering data points, as the company struggles to turn around a giant business that’s veered terribly off track, each new headline feels like a little fresh bloodletting.
This week’s abrasion came from Microsoft’s own financial results – a third straight quarter of decline for the Xbox business, with a 10% slump in Xbox content and services (and a 29% drop in hardware sales) dragging the results from the company’s “More Personal Computing” division down 4% overall. Microsoft CEO Satya Nadella talked up an imminent return to growth for the division in the earnings call, with Xbox CEO Asha Sharma reiterating that message in a memo a couple of days later – a brave face on a bad situation, at least.
The results have, unsurprisingly, inspired yet another round of articles about the slow-rolling disaster at Xbox. The narrative is well rooted at this point, every new development presented as further proof that the troubled division is sliding ever closer to an even greater disaster.
Nobody can claim that these financial numbers are good for Xbox – they are not. They are, however, not fresh evidence of anything. In fact, they’re closely in line with expectations set quite some time ago in Microsoft’s own projections. This isn’t evidence of a new or steeper decline for Xbox, merely confirmation that it’s proceeding as expected. The division didn’t miss its expectations or targets; it just hit some very underwhelming ones.
The division didn’t miss its expectations or targets; it just hit some very underwhelming ones.
What these numbers do give us an opportunity to think about, however, is how Xbox sits in relation to the rest of Microsoft’s business – arguably the most important existential question for the platform in the coming years. Amidst the endless analysis of the division’s woes (I’m self-aware enough to acknowledge that I’ve written a fair chunk of that myself), a kind of consensus has been emerging around the idea that Microsoft would actually rather be rid of Xbox, such that the division’s current restructuring is actually packaging it up for sale. That interpretation rests on the idea that Xbox is a drag on Microsoft’s other businesses; a lengthy experiment that never yielded results and is now an expensive distraction from the company’s core, profitable ventures.
If Xbox is a drag on Microsoft, though, it’s only in conceptual or headspace terms – not financial. Financially speaking, all of the woes and throes of recent years at Xbox are barely a rounding error on Microsoft’s overall numbers. This quarter’s 10% decline for Xbox drove a 4% drop for its enclosing division, More Personal Computing – which includes Windows, Surface, and Bing, along with Xbox – but the company’s overall numbers were still up strongly, with an 18% growth in revenue and a 31% growth in net income.
In other words, a brutally bad quarter for Xbox hardly moved the needle at all on the company’s overall results. All of the distress and upset in the gaming division over the past few months – including the bill incurred on severance packages for thousands of Xbox staff – could have been wiped out on Microsoft’s bottom line by a handful of better-than-expected days in the company’s gigantic Cloud and enterprise businesses. It’s worth noting that the Windows business also had a torrid quarter, with revenues dropping 7% – and that was also essentially a rounding error compared to the gigantic numbers flowing through the company’s Cloud services.
A brutally bad quarter for Xbox hardly moved the needle at all on the company’s overall results
That’s not to say that the future of Xbox is safe just because it’s largely unimportant to Microsoft’s bottom line. That particular sword cuts both ways – certainly, Microsoft’s top management isn’t going to lose too much sleep over the numbers coming out of the Xbox division, but equally, a division that’s not contributing significantly to the company’s growth story is an easy sacrifice to make next time some part of the business needs to be dragged kicking and screaming to the altar of efficiency and cost-cutting.
It’s unlikely, however, that there’s any sense of urgency within Microsoft about the idea of selling or spinning off Xbox – to the extent that such an idea has any currency at all. Certainly, there will be some within Microsoft who favour that approach, as there have been some people at the company who have been adamant for the past twenty-five years that Xbox is a needless distraction from the core business. Those people no doubt feel vindicated by recent troubles in the division, and given Microsoft’s famously cutthroat internal politics, are probably keen to twist the knife – perhaps even to carefully brief the idea of ending the firm’s dalliance with gaming for good – but that’s far from saying that they’ve won the argument at last.
If Xbox was to be sold off – if, as quite a few commentators now seem to believe, Asha Sharma’s secret mission is to slim down the division and truss it up as an attractive package to put on the market – then it would need to overcome some very major problems along the way.
Xbox may not be in a healthy state right now, but it still drives billions of dollars of revenue every quarter
First and foremost; Xbox may not be in a healthy state right now, but it still drives billions of dollars of revenue every quarter, not least thanks to major acquisitions like Activision Blizzard. Selling off the division would signal a major strategic retreat, and a costly one at that – realistically, Microsoft would probably have to accept a sale price tens of billions lower than the price it paid for Activision Blizzard, Zenimax, and its various other acquisitions over the past decade or so. That’s a fairly humiliating climbdown for the firm, no matter how much “refocusing on our core objectives” corporate verbiage you couch it in, and it wouldn’t escape notice that it would also shrink quarterly revenues by a few percent, which doesn’t square well with the growth story companies like Microsoft need to reaffirm on every earnings call.
Secondly, there’s the fact that a sale requires two parties – and even if Microsoft did want to sell, it’s not clear who would be buying. Microsoft would absolutely want to sell off the unit wholesale, if it came to it; it doesn’t want to risk being left with a messy collection of commercially unviable components after flogging off the prime parts of the business. That leaves us looking for a buyer with that $40-50bn kind of money to spend – and while big money deals are still possible in the current climate, as the imminent closing of the $55 billion deal to take Electronic Arts private demonstrates, the potential purchasers for a gigantic business like Xbox are extremely thin on the ground.
Companies already in the games space are a non-starter – not only do none of them have the cash or the inclination for that kind of spend, they’d also almost certainly fall foul of competition authorities. Major tech firms like Amazon and Google have scaled back their gaming ambitions in recent years and are now very unlikely to be in the market for such an expensive deal. Tencent might have been a likely candidate only a few years ago; now it’s seemingly slowing its gaming investments and even pulling back from some parts of the business.
Even if Microsoft did want to sell, it’s not clear who would be buying
The EA deal does raise a more distasteful spectre, the possibility of a politically motivated buyout by ideologues seeking cultural sway – but here, too, many of the most likely candidates either have problems of their own or have probably bitten off about as much as they can chew for now. The Ellison family, hoping to finalise their acquisition of Warner Bros Discovery in the next year or so, might be interested in turning their media empire into a gaming powerhouse, for example. However, with the Warner Bros acquisition already proving legally troublesome and the vultures gathering around Oracle’s finances, which underwrite the family’s entire media spending spree, it’s unlikely they’ll have the appetite for another deal on that scale in the immediate future.
Both sides of this equation are difficult to reconcile, in other words. Microsoft’s motivation for selling is far from clear, and the reputational damage from pulling out of the business (especially given the inevitable patterns people will infer from their earlier withdrawal from other consumer spaces such as smartphones and music devices) will give the company serious pause. Even if they do explore a sale, it’s hard to imagine who’s in the market to buy. By far the most likely future for Xbox sees it staying at Microsoft in at least the medium term.
The things Sharma would do if she were packaging Xbox up to sell aren’t all that different from the things she would do to reform the division
Part of the misunderstanding, perhaps, stems from the fact that the things Sharma would do if she were packaging Xbox up to put it on the market aren’t really all that different from the things she would do to reform the division and convince Microsoft’s management that it’s serious about controlling costs and delivering results. At a company as big and fractious as Microsoft, “selling” the Xbox division to the upper management is a task with a lot of parallels to selling it to an outside buyer; it’s easy to see where the confusion can arise.
Of course, this is an assessment that could easily be proved completely wrong in a very short space of time – Microsoft could announce tomorrow that they’re exploring a sale of Xbox to some external bidder or another. The balance of probabilities, however, points very much away from that happening. For all that recent years may have shaken Microsoft’s confidence in the Xbox business, it’s unlikely to be seriously contemplating a sale or spinoff in the foreseeable future; for better or worse, the future of Xbox is almost certainly as part of Microsoft.
