After 15 years of effort securing a spot next to television sets all over the world, Microsoft Corporation (MSFT) may finally be phasing out its Xbox gaming console business altogether. Although a retreat from the console business may seem like a step in the wrong direction, if true, this is actually good news for Microsoft stock.
There’s little to no downside, and there’s a lot of potential upside.
See, while the Xbox and its games were well-loved, the profitability of the company’s video game unit was always shaky … to the extent one could tell, anyway. The next-generation alternative to the Xbox may be a more fruitful product, and there’s a 72% chance anyone reading this already has or soon will own that alternative device.
For better or worse, at times investors as well as consumers (with some help from the media) can take the ball and run a little too far with it. The premise that Microsoft’s last stand-alone gaming console will be the 2013-released Xbox One isn’t a terribly far-fetched one, though.
How so?
The Rumor
The seed was planted by none other than Xbox chief Phil Spencer at the official Xbox one spring game-unveiling event last week.
His specific allusion:
“At Xbox we believe gamers should be able to play the games they want, with the people they want, on the devices they want. … Making more of our popular games available for gamers to play on either Xbox One or Windows 10, each powered by Xbox Live, is another important step towards this vision. We are committed to delivering amazing gaming experiences for gamers who play on consoles, PCs or both.”
The comment follows an announcement from just a few days earlier that informed gamers that their Xbox One device would soon be able to play even more Xbox 360 games … a line that the company seemed intent to avoid crossing.
But an end to consoles altogether? Surely a computer can’t run all Xbox 360 and Xbox One games as well (if at all) that an Xbox can.
Actually, it can, and arguably better.
The gaming software found on an Xbox is already found on Windows-powered devices. It’s called DirectX, and was written explicitly for the purpose of playing video games on a Windows machine. It’s still there on Windows 10, and inasmuch as the lines between console gaming and PC-based gaming have already been blurred by the advent of web-based gaming, it wouldn’t be crazy for Microsoft to lead the next era of that line-blurring rather than be forced to chase it.
And MSFT shareholders should be thrilled.
A Brilliant Move for Microsoft Stock
Not that Microsoft has ever offered a lot of great detail about its gaming division’s results to its shareholders, but as of late last year it simply began to lump its Xbox numbers into the “More Personal Computing” category where its success or failure could be plenty obscured.
Just before the modest details went away, however, a handful of observers were able to indirectly glean a handful of concerning details about the Xbox One. One of the ugliest details for Microsoft stock: The company probably loses money on every Xbox One it sells. Another concerning detail: To the extent one could ferret out even just a vague number before the company clouded its results, Xbox-driven revenue was only on the order of a few hundred million per quarter.
Even if the Xbox program was a profitable venture (and it probably wasn’t), it was never a big enough profit for Microsoft to spend time and resources on.
The alternative platform, however, will be worth its time and effort … Windows 10, and all subsequent versions of Windows.
It’s not a bad bet at all. The cost of consoles has steadily risen; the Xbox One retails for a minimum of $349, depending on the package. Meanwhile, the cost of PCs (including laptops) has steadily fallen, with some available for the same price as an Xbox, and just as powerful in terms of speed, memory, etc.
The difference to Microsoft is that it’s expensive to make pure gaming consoles. It’s cheap to serve up another digital copy of an operating system it has already made, which-oh-by-the-way, enables the software giant to monetize those gamers in a few dozen other ways.
Why do you think the company’s been giving Windows 10 away for free?
Bottom Line for Microsoft Stock
Any owners of Microsoft stock looking for this news to immediately propel MSFT in an upward direction may not want to hold their breath. Even shutting a business down can take time and money, and it’s not as if Spencer said anything definitively.
On the other hand, if the typical Windows 10 customer is ultimately more valuable/profitable to the company than an Xbox One gamer — and that is likely to be the case — then this is a modest game-changer. The move may even sell a few video games to PC owners who would never drop a few hundred bucks on a gaming console.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
