Microsoft’s emergence as one of the big three video console makers has been a technological achievement. Yet the company has never made a penny of profit on the business, even though it’s been selling consoles for six years. Now the software giant admits missing its already lowered sales targets for its Xbox 360. And it will take a $1 billion (Rs4,050 crore) charge to recall defective units. It’s time for the group to stop pumping quarters into this project.
Xbox certainly isn’t worthless. Microsoft claims the project will turn its first profit this fiscal year. And margins will improve as the Xbox 360, the latest iteration of the game console, ages. Much like razor handles and razor blades, games makers lose money by selling subsidized consoles and make their profits on high-margin games.
But there are two problems. First, console sales have been lower than Microsoft hoped. And publicity surrounding the recall could make gamers think twice before selecting an Xbox. This isn’t good news considering that Nintendo’s Wii console is already outselling the Xbox 360 by two to one in the US, according to research by NPD. And Wii’s lead is increasing.
Second, Microsoft appears increasingly bogged down trying to develop operating systems, business software, mobile device software, an Internet search business and a host of other services. Its entertainment division, of which Xbox is a part, accounts for only about 10% of its total sales and even less of its profit.
Spinning off the division looks like a good idea. Of course, this would mean the stand-alone business wouldn’t enjoy Microsoft’s deep pockets when it comes to developing new consoles. But is that all bad? Nintendo didn’t have the resources to compete head-on against Microsoft and Sony when it developed the Wii. So, rather than concentrating on technological one-upsmanship, it tried to make games that were fun to play. The result was a resounding success. Separating the consoles unit could allow Microsoft to focus on work, and Xbox on play.