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Microsoft Holding Onto the Xbox Brand AKA The Trouble with Shareholders

Shareholders, investors, and analysts want Microsoft to drop the Xbox division, but new CEO Satya Nadella is holding on.

Large parts of the gaming industry are under fire from people who know very little about it and care even less. To many players, they are the hidden cost of the business.

If you only follow game news about games and not the organizations behind them, you may have missed out on the fact that Microsoft is under new management. Old chief executive officer Steve Ballmer announced his intention to step down in August 2013 and Microsoft cloud computing boss Satya Nadella jumped into the role in February of this year. Ballmer have been changing things up at the end of his tenure, but it's clear Nadella is taking over a stumbling company. Products like Windows 8, Windows Phone, Bing, and Microsoft Surface just haven't been successful for the company. All Ballmer-driven initiatives that Nadella has to clean up now.

Nadella in-between his predecessors.

One thing that been constant under Ballmer's latter years and Nadella's early tenure is calls to divest Microsoft of the Xbox brand.

Some shareholders don't really understand the gaming sector outside of chasing the lucrative trends. That's why you see AAA, MMOs, MOBAs, free-to-play, and mobile; those are sectors where people have made big money, so that's where investors are likely to put their money. Many in the financial sector see Microsoft's core competency (the thing they do best) as software. Specifically, Windows and Office.

With Windows having issues, investors, analysts, and shareholders have repeatedly stated that Microsoft should drop what they see as the gaming boondoggle altogether. Vulcan Capital is the investment firm created by Microsoft co-founder Paul Allen and its chief investment officer said the Xbox brand was "detracting" from Microsoft's earnings. Former Nokia CEO Stephen Elop, who now runs the MS Devices $amp; Services group which contains Xbox, reportedly wanted to sell the group. Business people love to hate on the Xbox, it seems.

Yesterday, Nadella came out and made a definitive statement on the future of Microsoft and the future of Xbox.

"I also want to share some additional thoughts on Xbox and its importance to Microsoft," wrote Nadella. "As a large company, I think it's critical to define the core, but it's important to make smart choices on other businesses in which we can have fundamental impact and success."

Microsoft's Core in its own words. Sound familiar?

"The single biggest digital life category, measured in both time and money spent, in a mobile-first world is gaming. We are fortunate to have Xbox in our family to go after this opportunity with unique and bold innovation. Microsoft will continue to vigorously innovate and delight gamers with Xbox. Xbox is one of the most-revered consumer brands, with a growing online community and service, and a raving fan base. Bottom line, we will continue to innovate and grow our fan base with Xbox while also creating additive business value for Microsoft."

This follows the promotion of Microsoft Studios chief Phil Spencer to head of the Xbox division, comprising Xbox, Microsoft Studios, Xbox Music, and Xbox Video. These certainly aren't the moves of a company looking to get out of the console business.

What Nadella's statement does clarify is how Microsoft sees the Xbox brand. He mentioned gaming of course, but more importantly he called it part of the "digital life" category. Games are important - in a research report mentioned on The Guardian, it was noted that 85 percent of top-grossing mobile apps are games - but they're not the only focus. Digital life is about having control of your entertainment from end-to-end, like Apple and Google do for many. Making money on selling you the hardware and everything you're watching, playing, and reading on the hardware. It's why Google Play sells games, apps, movies, books, and music. It's why Xbox Music and Xbox Video exist at all. It's why Sony spent time on its E3 presentations talking about Music Unlimited and TV shows coming to PlayStation Plus subscribers.

Programs like Xbox Music are about being the only company behind your digital entertainment.

Digital life is about being all things to everyone, because that's where the money is. And shareholders want companies to follow the money. Why should we care as gamers about shareholders? Because those at the top of companies listen to them... to a point.

See shareholders invest money in a company and all they want is a return on investment. They don't necessarily care how companies make money, only that they do. Think of shareholders like parents butting into their child's college decisions: it's not really their place to choose your major, but they've ponied up enough money that you still have to listen to what they have to say and they think music theory is a bad idea for your future. As an example of this, here's a question posed to Nintendo's management in a recent investment Q & A.

"I do not understand video games and I even feel angry because, at Nintendo's shareholders' meetings, the shareholders always discuss things relating to video games or such childish topics as 'what the future of video games should be,' while I, for one, was flabbergasted that Mr. Iwata continues to hold his position although he had said that he would resign if the company's performance were bad," said the shareholder.

"I hope that Nintendo's shareholders' meeting will become an opportunity where the shareholders discuss the company's business operations from the viewpoints of capital gain and dividends."

Nintendo's reply in the situation involved thanking the shareholder for their "tough comment" and "valuable opinion." Because in the end, Nintendo's management continues to operate at the behest of its Board of Directors, who are appointed by shareholders. Here's an illustration from Nintendo's own corporate site:

If enough of the shareholders are dissatisfied, then that can extend to the Board of Directors, which leads to changes in management and company strategy. Current Nintendo president Satoru Iwata was re-elected to the position last month, but there were reports prior that he could've been voted off the Board and out of his position due to Nintendo's three years of consecutive financial losses. Nintendo fans worry about the press or other fans calling for Nintendo to go third-party or make mobile games, without realizing that the real problem could come from shareholders who have no affinity for the gaming business at all doing the same.

Even with wonderful game-oriented people like Iwata, Spencer, and SCE boss Andrew House at the head of these companies, we still have to worry about the thoughts and actions of the people above them. People who may not play games or even care about them. Those people will always exert subtle pressure on those who steward and control the games we play each year. The best we can do is to keep playing and paying for what we enjoy and hope that remains lucrative for the business types.

Tags: Analysis microsoft Nintendo

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