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Microsoft Should Give XBox One To Nintendo

Feb 18 2014, 1:56pm CST | by

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Microsoft Should Give XBox One To Nintendo
 
 

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Microsoft Should Give XBox One To Nintendo

Microsoft has a new CEO. And a new Chairman.  The new CEO says the company needs to focus on core markets.  And analysts are making the same cry.

Amidst this organizational change, XBox continues its long history of losing money – as much as $2 billion per year.  And early 2014 results show that XBox One  is selling at only half the rate of Sony’s  Playstation 4, with cumulative XBox One sales at under 70% of PS4, leading Motley Fool to call XBox One a “total failure.”

While calling XBox One a failure may be premature, Microsoft investors have plenty to worry about.

Firstly, the console game business has not been a profitable market for anyone for quite a while.

The old leader, Nintendo, watched sales crash in 2013, first quarter 2014 estimates reduced by 67% and the CEO now projecting the company will be unprofitable for the year.  Nintendo stock declined by 2/3 between 2010 and 2012, then after some recovery in 2013 lost 17% on the January day of its disappointing sales expectation.  Not a great market indicator.

The new sales leader is Sony, but that should give no one reason to cheer.  Sony lost money for 4 straight years (2008-2012), and was barely able to squeek out a 2013 profit  only because it took a massive $4.6B 2012 loss which cleared the way to show something slightly better than break-even.  Now S&P has downgraded Sony’s debt to near junk status.  While PS4 sales are better than XBox One, in the fast shifting world of gaming this is no lock on future sales as game developers constantly jockey dollars between platforms.

Whether Sony will make money on PS4 in 2014 is far from proven.  Especially since it sells for $100/unit (20%) less than XBox One – which compresses margins.  What investors (and customers) can expect is an ongoing price war between Nintendo, Sony and Microsoft to attract sales.  A competition which historically has left all competitors with losses – even when they win the market share war.

Will game console sales decline like PC sales?

On top of profit worries is the threat that console market growth may stagnate as gamers migrate toward games on mobile devices.  How this will affect sales is unknown.  But given what happened to PC   sales it’s not hard to imagine the market for consoles to become smaller each year, dominated by dedicated game players, while the majority of casual game players move to their convenient always-on device.

Due to its limited product range, Nintendo is in a “fight to the death” to win in gaming. Sony is now selling its PC business, and lacks strong offerings in most consumer products markets (like TVs) while facing extremely tough competition from Samsung and LG.  Sony, likewise, cannot afford to abandon the Playstation business, and will be forced to engage in this profit killing battle to attract developers and end-use customers.

When businesses fall into profit-killing price wars the big winner is the one who figures out how to exit first. 

Back in the 1970s when IBM  created domination in mainframes the CEO of GE realized it was a profit bloodbath to fight for sales against IBM, Sperry Rand  and RCA.  Thinking fast he made a deal to sell the GE mainframe business to RCA so the latter could strengthen its campaign as an IBM alternative, and in one step he stopped investing in a money-loser while strengthening the balance sheet in alternative markets like locomotives and jet engines – which went on to high profits.

With calls to focus, Microsoft is now abandoning XP.  It is working to force customers to upgrade  to either Windows 7 or Windows 8.  As PC sales continue declining, Microsoft faces an epic battle to shore up its position in cloud services and maintain its enterprise customers against competitors like Amazon.

After a decade in gaming, where it has never made money, now is the time for Microsoft to recognize it does not know how to profit from its technology – regardless how good.  Microsoft could cleve off Kinect for use in its cloud services, and give its installed XBox base (and developer community) to Nintendo where the company could focus on lower cost machines and maintain its fight with Sony.

Analysts that love focus would cheer.  They would cheer the benefit to Nintendo, and the additional “focus” to Microsoft.  Microsoft would stop investing in the unprofitable game console market, and use resources in markets more likely to generate high returns.  And, with some sharp investment bankers, Microsoft could also probably keep a piece of the business (in Nintendo stock) that it could sell at a future date if the “suicide” console business ever turns into something profitable.

Sometimes smart leadership is knowing when to “cut and run.”

Connect with me on LinkedIn, Facebook  and Twitter.

Source: Forbes

 

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<a href="/latest_stories/all/all/31" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

 

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