09-21-2013 02:26 AM
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  1. AR2186's Avatar
    We're all on the same side here. We all support Microsoft's long term vision, or we at least share the views of technology enthusiasts. Unfortunately, that isn't a majority view, and society has setup a system that ascribes value to something very different! MS' institutional investors care not one iota that Xbox isn't a viable stand alone business. What they do care about is that the Xbox division is a drag on Microsoft's stock value, profitability and dividend payouts. That they would be killing Xbox is completely irrelevant to them. That's just modern capitalism.


    I'm not sure it is correct to call such a large slice of the population "nut jobs". Real nut jobs rarely wield as much power as these people do. Selfish, parasitic, self aggrandizing, yes, absolutely, but not crazy.

    Considering that Microsoft's Xbox division has lost billions over the last decade, and I'm sure these people have no more patience to let MS spend more money on their Xbox "sideshow". I'm sure that the Xbox console not being subsidized is a consequence of their influence. If that higher price causes the Xbox One to be uncompetitive against the subsidized PS4, then it will be just another reason to scrap the division.

    These people have no love for technology (at least not in their professional role), or the patience for a long term vision to play out. As you said, their job is to siphon off as much money as they can within a "useful" timeframe (under five years), which is why it simply doesn't matter what would happen to an independent Xbox division.


    I suspect they will be too, but at this point they really have no choice. IMHO it's be profitable or die. The Xbox One doesn't cost $100 more than the PS4 because it's that much more expensive to build.
    I may love tech, but I am also one of those institutional investors (though not in Microsoft and not solely concerned with short term profit). I am telling you, it can not stand alone from a valuation standpoint, and investors shouldn't push for it to be spun off because it will not make the sum of Microsoft's parts greater than the whole.

    That said, it definitely adds significant value as a part of Microsoft's business as it leverages their technology and expands their end markets and overall integration.
    09-14-2013 02:38 PM
  2. Keith Wallace's Avatar
    "Real nut jobs rarely wield as much power as these people do."

    There are SO MANY examples of that in global political office that would prove you wrong.
    09-14-2013 03:05 PM
  3. Reflexx's Avatar
    Ok so when is XBox going to pull it's own weight? By the year 3000?
    The 360 was pulling its own weight. It made up for the deficits incurred during the original XBOX days.

    The XBOX ONE hardware is going to be sold at break even (or even a little more) from the start. So it will already begin pulling its own weight early in the life cycle.
    09-14-2013 03:16 PM
  4. spaulagain's Avatar
    The 360 was pulling its own weight. It made up for the deficits incurred during the original XBOX days.

    The XBOX ONE hardware is going to be sold at break even (or even a little more) from the start. So it will already begin pulling its own weight early in the life cycle.
    Ya, last I heard Xbox was back in the black. 5 years ago I could see why investors would want to sell it off. But now it plays a key role in Microsoft's strategy and has the potential to be a huge part of every household.
    Investors would be foolish to attempt to sell now. And why would they invest in 300,000+ servers for Xbox and then turn around and sell it.
    09-14-2013 03:27 PM
  5. Reflexx's Avatar
    XBOX is too tied into the overall MS strategy. They want Windows to control your TV.
    09-14-2013 04:05 PM
  6. a5cent's Avatar
    "Real nut jobs rarely wield as much power as these people do."

    There are SO MANY examples of that in global political office that would prove you wrong.
    I don't think that proves me wrong.

    TBH, it probably depends on our definition of crazy. I consider Putin a megalomeniacal pseudo-dictator, but I don't consider him crazy. You might, in which case our assessments will obviously differ. This is the type of person that can climb the career ladder in the investment business.

    Some politicians, particularly in the U.S, truly are crazy, but they also have no real power. Take away their money base and their careers end. Their agenda is dictated to them and their voting record aligns perfectly with the interests of their money donors (describes most). Such politicians have no real power.
    Last edited by a5cent; 09-14-2013 at 07:00 PM.
    09-14-2013 04:23 PM
  7. a5cent's Avatar
    I may love tech, but I am also one of those institutional investors (though not in Microsoft and not solely concerned with short term profit). I am telling you, it can not stand alone from a valuation standpoint, and investors shouldn't push for it to be spun off because it will not make the sum of Microsoft's parts greater than the whole.
    I had already told you that I agree that the Xbox division can't stand alone. It just doesn't matter. Those institutional investors that have a seat on MS' board want it spun off, at least most of them. Either that or profitability, now.
    09-14-2013 04:35 PM
  8. spaulagain's Avatar
    I had already told you that I agree that the Xbox division can't stand alone. It just doesn't matter. Those institutional investors that have a seat on MS' board want it spun off, at least most of them. Either that or profitability, now.
    How can they spin it off if no company is willing to buy it? If investors want it gone, they need to sell it to a company so they can make money off the sale. If it can't function outside Microsoft, then no company is going to buy it from Microsoft.

    Investors want all kinds of things, doesn't mean its going to happen.
    09-14-2013 05:30 PM
  9. a5cent's Avatar
    How can they spin it off if no company is willing to buy it? If investors want it gone, they need to sell it to a company so they can make money off the sale. If it can't function outside Microsoft, then no company is going to buy it from Microsoft.

    Investors want all kinds of things, doesn't mean its going to happen.
    There are many ways to do that. If you find no buyer, then MS can function as its own venture capitalist. Setup a new company, fund it with 500 million and sell them the Xbox division for $1, after which you let them fend for themselves. If they don't even want to do that, MS can can just shut operations down and gift the IP and trademarks to any group of former employees that might want to try their own luck. Many possibilities exist.

    I don't know who all the big MS stock holders are, but if enough of them want to get rid of the division, then that is what will happen. They have the final say.
    09-14-2013 06:50 PM
  10. spaulagain's Avatar
    There are many ways to do that. If you find no buyer, then MS can function as its own venture capitalist. Setup a new company, fund it with 500 million and sell them the Xbox division for $1, after which you let them fend for themselves. If they don't even want to do that, MS can can just shut operations down and gift the IP and trademarks to any group of former employees that might want to try their own luck. Many possibilities exist.

    I don't know who all the big MS stock holders are, but if enough of them want to get rid of the division, then that is what will happen. They have the final say.
    Sell it for a dollar? They are essentially dissolving the division at that point. Hell, they might as well not even create that pet company.

    If investors really wanted to throw the division away, they wouldn't have put all this effort into the new Xbox One, Xbox Music, etc. And Xbox is still the only brand that has a truly positive brand image.

    Xbox has already matured...

    http://www.businessinsider.com/chart...-gaming-2011-1

    Microsoft is famous for running products at a significant loss until it sticks. And when it does stick, they make the real money.

    They've spent over 10 years and its finally profitable, so now they will dump it? I doubt it. The Xbox brand is about to explode over the next 5 years. IMO, the Xbox will be THE entertainment hub in homes. It has the position and power to be so much more than just a gaming console.

    Meanwhile, PlayStation has nothing like that. Why would Microsoft just give up an edge in the industry? An opportunity to be at the center of every home.
    Last edited by spaulagain; 09-14-2013 at 08:11 PM.
    09-14-2013 07:53 PM
  11. AR2186's Avatar
    I had already told you that I agree that the Xbox division can't stand alone. It just doesn't matter. Those institutional investors that have a seat on MS' board want it spun off, at least most of them. Either that or profitability, now.
    They are giving ValueAct 1 seat, but they own ~1% and really can't push the Board to do anything, other than buy back more stock and pay a bigger dividend. Ballmer and Gates own far more and will be able to exert much more influence.
    09-14-2013 07:55 PM
  12. spaulagain's Avatar
    They are giving ValueAct 1 seat, but they own ~1% and really can't push the Board to do anything, other than buy back more stock and pay a bigger dividend. Ballmer and Gates own far more and will be able to exert much more influence.
    Exactly, just because some weasel investor spouts out some BS, doesn't give it any merit.
    blackprince likes this.
    09-14-2013 08:12 PM
  13. AR2186's Avatar
    Exactly, just because some weasel investor spouts out some BS, doesn't give it any merit.
    To be fair, Microsoft should pay a higher dividend and probably should issue some debt to buy back stock with borrowing costs at pretty much once in a lifetime levels. They have an astounding amount of cash, but its all offshore and can't be repatriated without paying 35% taxes, so they haven't done much with it yet (except for Nokia).

    Also, I take a bit of offense to the hating on institutional investors. Institutional investors serve an important part in our economy and efficient capital allocation, as well as a huge part in everyone's retirement planning. While I understand much of the sentiment, not all of us are bad
    09-14-2013 11:47 PM
  14. spaulagain's Avatar
    To be fair, Microsoft should pay a higher dividend and probably should issue some debt to buy back stock with borrowing costs at pretty much once in a lifetime levels. They have an astounding amount of cash, but its all offshore and can't be repatriated without paying 35% taxes, so they haven't done much with it yet (except for Nokia).

    Also, I take a bit of offense to the hating on institutional investors. Institutional investors serve an important part in our economy and efficient capital allocation, as well as a huge part in everyone's retirement planning. While I understand much of the sentiment, not all of us are bad
    That wasn't an insult to all investors, just the one that's been vocal about this Xbox stuff.

    The company I work for just got bought by investors 8 months ago. I'm fully aware of what investors can do, good and bad.
    09-15-2013 12:36 AM
  15. smoledman's Avatar
    If Alan Mullaly is the next CEO, the first thing he will do is spin off XBox.
    09-15-2013 01:07 AM
  16. a5cent's Avatar
    They are giving ValueAct 1 seat, but they own ~1% and really can't push the Board to do anything, other than buy back more stock and pay a bigger dividend. Ballmer and Gates own far more and will be able to exert much more influence.
    ValueAct is not the only investor with such sentiments. Many (if not all) of MS' institutional investors believe MS should abandon the consumer market entirely. Half the people on MS' BoD are appointed from financial institutions. I don't know how voting power is distributed, but many speculate that Ballmer wanted to settle the Nokia deal before a new seat for yet another investment firm is created. To me that doesn't sound like everything is cut and dry. That the XB1 isn't subsidized to the same degree also hints at changing priorities... that is what I'm basing my assessment on.
    09-15-2013 06:43 AM
  17. AR2186's Avatar
    ValueAct is not the only investor with such sentiments. Many (if not all) of MS' institutional investors believe MS should abandon the consumer market entirely. Half the people on MS' BoD are appointed from financial institutions. I don't know how voting power is distributed, but many speculate that Ballmer wanted to settle the Nokia deal before a new seat for yet another investment firm is created. To me that doesn't sound like everything is cut and dry. That the XB1 isn't subsidized to the same degree also hints at changing priorities... that is what I'm basing my assessment on.
    I don't think you know how Board nominations work. When ValueAct finally gets a board seat in 2014, they will be the first financial institution to appoint a board member. Other members have been nominated by the nominating committee of the then-current board of directors, and is voted on by the shareholders. Unless a shareholder really disagrees with the board, they nominee will be elected and the status quo will continue. Traditional Institutional Investors (mutual funds) generally will not disagree with management because they end up losing access to the management team, while ETF managers and Index Fund managers nearly always vote the way the proxy services suggest because they are not in the business of evaluating companies (just giving you exposure to certain markets). The only time I have ever seen an Index Fund go against a proxy service was the first few Dell votes when Vanguard allegedly voted against the deal.

    The current shareholder base is as follows:
    - BlackRock - 5.5% - Mix of Index Funds (iShares) and Mutual Funds
    - Capital Group - 5.1% - Looks to be mostly Mutual Funds
    - Bill Gates - 4.5%
    - Vanguard - 4.3% - Index Funds
    - Steve Ballmer - 4%
    - State Street - 3.99% - Index Funds

    Everyone else owns less than 2% of the company, with ValueAct only having 0.69% of the ownership.

    If Alan Mullaly is the next CEO, the first thing he will do is spin off XBox.
    I follow tech due to my overall interest in the sector and to make personal investments, with my main work focus being Autos and Auto Suppliers. Mullaly is a very interesting name, but I don't think he's a realistic candidate. While he does know Ballmer pretty well and still lives in Seattle (from Boeing days), he's a bit too old at this point and still has some work to do at Ford. He's also made some questionable decisions while at Ford (selling Volvo for peanuts to the Chinese to focus on Lincoln...). I honestly think that the name was floated to keep institutional investors at bay for a while before Elop is named CEO

    That wasn't an insult to all investors, just the one that's been vocal about this Xbox stuff.

    The company I work for just got bought by investors 8 months ago. I'm fully aware of what investors can do, good and bad.
    Fair enough, I just don't like the broad characterizations that many people throw around.
    Last edited by AR2186; 09-15-2013 at 11:13 AM.
    09-15-2013 10:52 AM
  18. spaulagain's Avatar
    ValueAct is not the only investor with such sentiments. Many (if not all) of MS' institutional investors believe MS should abandon the consumer market entirely. Half the people on MS' BoD are appointed from financial institutions. I don't know how voting power is distributed, but many speculate that Ballmer wanted to settle the Nokia deal before a new seat for yet another investment firm is created. To me that doesn't sound like everything is cut and dry. That the XB1 isn't subsidized to the same degree also hints at changing priorities... that is what I'm basing my assessment on.
    Abandon the consumer market entirely? Are they fvcking stupid? How do they think Apple gained so much over the past decade? By focusing on the consumer. Consumers drive demand, even relative to businesses. Now even businesses are being drawn into the world of Apple. The truth is that every employee in a business is a consumer. And if a company can draw so much attention from those consumers, businesses will have to follow that demand as well.

    The mindset of investors you are describing sounds like a bunch of idiots. Anyone with common sense recognizes the explosion of consumer demand for "PC" devices and electronics. Computers are no longer just business focused devices, they are now a part of every consumers life. Even 2 year olds have iPads now.

    Microsoft already owns the business environment. But they have been completely missing out on the consumer. As a result they are falling behind and that's impacting their grip on businesses as well.

    Investors will lose everything if they force Microsoft out of the consumer market.
    09-15-2013 11:07 AM
  19. smoledman's Avatar
    Abandon the consumer market entirely? Are they fvcking stupid? How do they think Apple gained so much over the past decade? By focusing on the consumer. Consumers drive demand, even relative to businesses. Now even businesses are being drawn into the world of Apple. The truth is that every employee in a business is a consumer. And if a company can draw so much attention from those consumers, businesses will have to follow that demand as well.

    The mindset of investors you are describing sounds like a bunch of idiots. Anyone with common sense recognizes the explosion of consumer demand for "PC" devices and electronics. Computers are no longer just business focused devices, they are now a part of every consumers life. Even 2 year olds have iPads now.

    Microsoft already owns the business environment. But they have been completely missing out on the consumer. As a result they are falling behind and that's impacting their grip on businesses as well.

    Investors will lose everything if they force Microsoft out of the consumer market.
    It's not fvcking stupid to recognize that MS consumer efforts are pathetic at best and they'd best concentrate on their enterprise business before Google takes it away from them.
    09-15-2013 03:54 PM
  20. a5cent's Avatar
    I don't think you know how Board nominations work.
    Correct. I don't understand the process in detail. I also fail to see why that is relevant to this discussion. I'd say this isn't about the nomination process, but about the BoD's and investors continual support for a division which lacks both short term profit earning potential and strategic relevance (in some investors view).

    You seem to be making the point that few of MS' board members would vote against the chairman and CEO. I can't judge that myself, but apparently VauleAct is expected to be combative. More importantly, they intend to rally as many investors to their cause as they possibly can, which is to split up MS and increase shareholder value. Considering that is exactly what dozens of smaller investors have been calling for over the last few years, that possibility doesn't seem so far fetched to me as you seem to think it is.

    The Xbox doesn't pack cutting edge hardware. Neither is it subsidized to the degree previous console generations were. I consider both moves indicative of wanting to placate investors by reducing the Xbox's division's loses, even at the cost of reduced price competitiveness compared to the PS4.

    I don't harbour any strong opinions on this topic myself (I'm not an expert). All I can say is that the financial press seems to consider a break up more than just a theoretical possibility.
    09-15-2013 05:10 PM
  21. spaulagain's Avatar
    It's not fvcking stupid to recognize that MS consumer efforts are pathetic at best and they'd best concentrate on their enterprise business before Google takes it away from them.
    Their consumer efforts are pathetic because they've been completely out of the game. Microsoft has always been about enterprises. They've mastered that market for quite some time. The reason they are losing any of that ground to Google or Apple is because of the consumer market. Consumers are swaying the enterprises to brands and products they like. That's why so many business support iPhone. Google docs suck compared to Office online, I've used them both. But companies are starting to pick up Google products because their employees (including managers/executives are using those products).

    Focusing on just enterprises will slowly push Microsoft out of the market completely. The market has shifted, consumers now determine what is the best product, not enterprises.

    Any half way intelligent investor can see the shift towards consumers.
    Last edited by spaulagain; 09-16-2013 at 09:46 AM.
    MerlotC and a5cent like this.
    09-15-2013 08:03 PM
  22. Polychrome's Avatar
    Their consumer efforts are pathetic because they've been completely out of the game. Microsoft has always been about enterprises. They've mastered that market for quite some time. The reason they are losing any of that ground to Google or Apple is because of the consumer market. Consumers are swaying the enterprises to brands and products they like. That's why so many business support iPhone. Google docs suck compared to Office online, I've used them both. But companies are starting to pick up Google products because their employees (including managers/executives are using those products).
    And that's the deal right there. Killing off consumer products would destroy Microsoft utterly.

    Remember blackberry? Yeah, they're still around. Sort of. They were the king of business email for awhile. Secure, dependable, reliable. Ready for work.

    So why did iPhone and Android take over? I mean, Android's email support is downright terrible, especially after the manufacturers have had their say. Iphone is okay...until you get a stuck email that hammers the server and eats your data plan in an hour. So up against that horrendously obvious display of incompetence, why is it Blackberry that is practically dead?

    Simple: It's the dang app stores. The ability to "download stupid stuff much faster" pastes itself in these peoples' heads. They don't care how good the email support is unless it doesn't work. (Then the carrier makes a handy scapegoat.) They just want to download candy crush.

    It's not that you couldn't install games or watch movies on a Blackberry Storm, and it sure as heck wasn't that there weren't any apps. It's because most of the software was self-published by indie devs on forums (such as crackberry). Installing and using them requires at least some computer skill. Your average facebooker took one look at it and ran to the iPhone. They just know that if there is no app store, that it means there are no apps, and therefore, nothing on the phone that will entertain them. This is what Microsoft is truly up against. Not Android, not Apple, and certainly not Sony either. This is their company's fight for survival. Consumer perception is everything, even if that perception is downright wrong.

    So, fast forward to Windows 8, the supposed horrible failure. I've been noticing an increasing number of Win 8 tablets around the office. Yes, even RT models. Some people even prefer RT devices. Funniest thing, eh? And much of what people think of as "xbox" has been heavily integrated into the operating system.

    Android tablets and iPads were fun, but in the long run, they weren't very work oriented. People now finally want something more than a portable youtube player. It's starting to sink in that Android tablets and iPads are toys. They don't want to give up the "toy" aspect, but they're starting to miss computers actually doing work.

    THIS is why Xbox won't spin off. Because Xbox *IS* Windows 8. It's what melds the fun and work and lets people have it both ways. Xbox has *always* existed for this. Ever since the Sega Dreamcast, Microsoft's purpose has always been to bring it all back to the PC. Investors may think they don't need Xbox to survive, but Windows definitely does. They're taking a lot of the right steps, and yes, their positioning needs some work. But if they lose the Xbox, they lose the war.
    a5cent likes this.
    09-17-2013 07:00 PM
  23. firewall2302's Avatar
    I agree that the idea of selling off xbox is a crazy idea. Right now Microsoft is in their best position in years to revitalize the business. Anything other than this would be making a short term gain at the cost of long term profits.

    The integrated kernel between WP8, WinRT, Win8, and xbox is a fantastic idea. The news that Cortana will follow you from platform to platform and help provide a unified experience between all of the different devices? Absolutely brilliant.

    The idea that MS is allowing Google to compete because MS has been working on consumer products is also a load of bunk to me. Google has made its way into business by becoming familiar with the consumer first which means they're more comfortable at work with it. It's how Microsoft built their empire in the first place and seems like a silly idea to abandon that same strategy 30 years later, especially when competitors are using the same strategy against them now.
    09-17-2013 08:05 PM
  24. a5cent's Avatar
    THIS is why Xbox won't spin off. Because Xbox *IS* Windows 8. It's what melds the fun and work and lets people have it both ways. Xbox has *always* existed for this.
    I completely agree with all your points that follow the sentence I quoted. Unfortunately, it is a known fact that many institutional investors disagree. Institutional investors calling for a spin off have been a dime a dozen these last two years. I think if the XB1 sees success quickly and can at least break even, then nothing changes. If XB1 sales don't meet sales expectations, that is when things get complicated.
    09-18-2013 03:32 PM
  25. iZangetsu's Avatar
    I really hope not, the way Xbox connects with the rest of Windows platforms has me hooked. If they change that now I wouldn't know what to do.
    09-18-2013 04:34 PM
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