XBox to be spun-off into its own company [speculation]

a5cent

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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.
 

AR2186

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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.
 
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spaulagain

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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.
 

smoledman

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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.
 

a5cent

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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.
 

spaulagain

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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.
 
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Polychrome

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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.
 

firewall2302

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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.
 

a5cent

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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.
 

iZangetsu

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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.
 

AR2186

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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.
As I've tried to explain, the shareholder base isn't correct for an activist spin off, and no one actually wants Xbox spun off, they want the business division (Office, Exchange, etc) spun off.

No obe really thinks you can spin off Xbox because you wouldnt get anything for it, either by floating it as a separate company or selling it off. It is a part of Windows, just like Windows Phone and just like Windows Server
 

a5cent

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As I've tried to explain, the shareholder base isn't correct for an activist spin off, and no one actually wants Xbox spun off, they want the business division (Office, Exchange, etc) spun off.

No obe really thinks you can spin off Xbox because you wouldnt get anything for it, either by floating it as a separate company or selling it off. It is a part of Windows, just like Windows Phone and just like Windows Server

I'm sorry, but it's your word against that of many others. Google can surface dozens of articles discussing a possible spin off. I'm not saying it will happen. Only that it isn't impossible.

The point of a spin off isn't to get anything out of it. The point would be to get rid of a division that is a drag on the rest of the company.
 

spaulagain

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I'm sorry, but it's your word against that of many others. Google can surface dozens of articles discussing a possible spin off. I'm not saying it will happen. Only that it isn't impossible.

The point of a spin off isn't to get anything out of it. The point would be to get rid of a division that is a drag on the rest of the company.


But its not anymore. Its back in the black for several years now. And has the potential to be a massive money maker.
 

a5cent

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But its not anymore. Its back in the black for several years now. And has the potential to be a massive money maker.

No. The Xbox 360 won't ever be a massive money maker. With the introduction of the Xbox One, it has become clear that the Xbox 360 won't ever earn the money back that MS invested into making it. Investors doubt that the Xbox One will do much better. You can't really blame them either. From their point of view, MS has spent ten years trying to prove the Xbox 360's viability as a profitable business and failed. Why exactly should that change now, with a new console that is much more expensive to produce and is sold at an even lower profit margin than the Xbox 360 was sold at in 2013? That is their thinking.
 

spaulagain

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No. The Xbox 360 won't ever be a massive money maker. With the introduction of the Xbox One, it has become clear that the Xbox 360 won't ever earn the money back that MS invested into making it. Investors doubt that the Xbox One will do much better. You can't really blame them either. From their point of view, MS has spent ten years trying to prove the Xbox 360's viability as a profitable business and failed. Why exactly should that change now, with a new console that is much more expensive to produce and is sold at an even lower profit margin than the Xbox 360 was sold at in 2013? That is their thinking.


Except over the past 3 years it has been profitable. The reason it went negative was because Microsoft screwed it up with the first one. And then the 360 released with so many issues. So now that it is profitable is when they should drop the whole thing? Bullsh!t.

Any common sense investor will see the potential income from a device that stands to be in every families living rooms, has game licensing out the wazzo, can replace all cable TV DVRs in the near future, is a center for advertising for games, tv, and movies. And the list goes on.

Their thinking is not represented holistically by the few loud mouths that have suggested spinning it off. I understand that some may feel that way, but not enough to sway the whole group.

My company just got bought by investors. We actually aren't doing that well this year, but that's because we are having to make some sacrifices to position us for the future. This is a very common practice for investors. Microsoft is a big company and long term strategies are just that, loonnnnggg term.
 

a5cent

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So now that it is profitable is when they should drop the whole thing? Bullsh!t.

You are missing the point. The Xbox division is profitable because the 360 is now dirt cheap to produce and can be sold at a profit.

With the release of the XB1 that changes. MS fully expects profits to shrink to nearly zero.
 

spaulagain

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You are missing the point. The Xbox division is profitable because the 360 is now dirt cheap to produce and can be sold at a profit.

With the release of the XB1 that changes. MS fully expects profits to shrink to nearly zero.

And they've also dropped the price and increased the specs as the costs dropped. Including the Kinect packages.

The reason Xbox division lost so much is because they sold units at a loss and then had to replace the majority of them as they were suffering ring of death. Not to mention their revenue model was still being developed.

With Xbox One they are no longer selling the unit at a loss. They've fine tuned the divisions operations and mastered their revenue model. They also have a strong market share to work from whereas before they were still the underdog having to make sacrifices in profit to gain market share.

Microsoft will be getting revenue from game licensing, live memberships, subscriptions services like Xbox music, advertisements on all Xbox properties for movies, apps, music, games, etc. And they may get revenue through cable companies if they eventually move to replace everyone's DVR with an Xbox One or some sort of related product.

Its actually a huge market opportunity, especially with all the additional functionality it will have over PlayStation.

I don't know why you are so convinced that Xbox is forever destined to be a profitless division.
 

a5cent

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I don't know why you are so convinced that Xbox is forever destined to be a profitless division.

I'm not. You still think you are arguing with me, when all I'm doing is reflecting investor sentiment.

I don't buy any of your arguments in regard to "MS having perfected their revenue model". MS hasn't perfected anything. MS has simply been backed into a corner where they have no choice but to to avoid large losses. The result is a console that is about as powerful as its main competitor, the PS4, but costs $100 more. That is a risky sales proposition. MS wouldn't make that gamble if they didn't have to.

MS have opened up a few new revenue streams. It will be interesting to see how Xbox TV works out. It's still one big experiment though, and they really need it to work this time. That is all I'm saying.

Anyway, I feel we are going around in circles at this point. If you still don't understand the point I'm trying to make then I'll have to accept that I failed to explain it well enough.
 

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