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.

Analysis by Mike Williams, .

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.

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Comments 16

  • Avatar for metalangel #1 metalangel 3 years ago
    What I think is interesting is that pushing for this all-in-one 'digital life' experience is a large part of the reason why the Xbox One has struggled. The damage done from the presentations focusing on PVR functionality, music, always-online to ensure the DRM of such things was enforced... sure, it would have made the investors rich but it would never have happened because the customer base for the product simply was not interested in it and indicated this en masse.

    I wonder how much pressure there was from the board to include all those features and now that it hasn't worked out, they're blaming MS as if it's their fault somehow. Windows 8, trying to tell customers what they want... what a mistake. Again with Xbox One and so many features, especially the Kinect.

    Yes MS, is stumbling. They don't have the style or reputation of Apple, they don't have the friendlier, cheaper and reliable image of Google. They're caught in third place viewed as a big greedy corporation whose products cost too much and simply aren't as good as either of those two.
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  • Avatar for Pacario #2 Pacario 3 years ago
    "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..."

    This is true; fans shouldn't worry about what the press or other fans are saying, as Nintendo rarely shows much concern about what either think anyway. Indeed, the company is notorious for its silence on various matters, and its boilerplate gestures towards others. Only the headlines that suddenly blow up in its face, like the Tomodachi debacle or the cancellation of Smash at Evo last year, get meaningful attention (and possible correction) from the company.

    But shareholders are indeed a different matter; I'm not sure if replacing Mr. Iwata would have been such a bad thing, but either way, I'm sure he's been feeling the Board's pressures for a long time. Heavy is the head that wears the crown, it seems, but this is where Nintendo's conservatism and revulsion to change are good things. Fans fearing Nintendo going third-party or otherwise changing its core business philosophies have nothing to worry about; that won't be happening for a very long time, if ever.Edited July 2014 by Pacario
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  • Avatar for Thusian #3 Thusian 3 years ago
    This is actually why I get exhausted by how much the enthusiast sites cover every little bit of the business aspect. Really it has boiled down to little more than the latest iteration of the my dog's better than your dog console wars. People don't hold up software or even tech spec as much as point to sales figures as to why they made the right purchase decision.

    This despite the fact that as you said these investors do not care if gaming becomes a big homogeneous crap fest so long as the masses buy the thing they invested in. And if its not the core of their business like at MS the investors will just say lets kill it because who gives a shit. Its what leads people to chase success and I hate it.
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  • Avatar for hal9k #4 hal9k 3 years ago
    Great analysis, Mike. I find articles like this about the business end of the industry really interesting. Also, I agree with metalangel's points. It looks to me like the Xbox One was designed to satisfy every constituency except for the consumer. Shareholders could be excited about plans to "own the whole ecosystem" like Apple, and big content providers like EA, Activision, and Ubisoft could be excited by the original draconian DRM schemes. I really don't think consumers want any of that, and the sooner shareholders realize that, the more profits will flow to them.

    Although I've never owned an Xbox system, I hope they pull through and stay in the games industry. Competition and diversity are good for everybody, and could help drive innovation. I'm glad Nintendo's still doing their own thing for the same reason.

    I do worry about the proximity of the words "mobile" and "Xbox" in the statement you quoted. What's that about? I do sort of agree with the shareholders that MS needs to focus more on their core strengths of Windows and Office. Mobile and cloud are not their area and never have been. As great as smartphones and tablets are, everyone I know sits down at a laptop or desktop to do any serious work, and that's the MS market. You know all that "content delivery" stuff with music, movies, and social that Xbox was supposed to excel at? My 5-year old desktop PC rocking Vista does that better. I'm shopping for a new PC, and that's where I want MS to meet my needs for those things. Just stick with games on the console and give us some unique experiences, and the consumers will come.Edited July 2014 by hal9k
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  • Avatar for AxiomVerge #5 AxiomVerge 3 years ago
    More reasons to be an indie.
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  • Avatar for CK20XX #6 CK20XX 3 years ago
    I have greater sympathy for Microsoft after seeing that infamous Nintendo shareholder comment. I'm also even more thankful that Valve never wants to become a publicly traded company in the first place.
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  • Avatar for docexe #7 docexe 3 years ago
    I don’t really know the specifics, but I was under the impression that the main advantage Nintendo had when it came to dealing with shareholders was that the majority percentage of their shares was controlled by the Yamauchi family. Granted, I don’t know how things are now that Hiroshi Yamauchi died, and I remember reading that they engaged in a share buyback plan in order to get his shares back (aka a defensive measure). Still, it seems unlikely that they will succumb to the pressure of going mobile or third party, at least in the short term. Satoru Iwata, on the other hand, will continue to feel the pressure.

    As to Microsoft, I had some concerns at first when they appointed the new CEO, but after the restructuring and the appointment of Phil Spencer as boss of Xbox, I started to have serious doubts that they were going to sell the Xbox division. As things stand, while lagging behind the PS4 and souring many people with her original policies, the brand is still very popular and has been ultimately the most successful product of their consumer’s division. It was also positioned since the beginning as the cornerstone for their plans to create a multimedia ecosystem. In that sense, I’m not surprised by this announcement.
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  • Avatar for MHWilliams #8 MHWilliams 3 years ago
    @docexe They still have a strong interest, but shares were eaten up quickly by financial institutions while the Wii was trending high. Here's the full list from Nintendo itself: July 2014 by MHWilliams
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  • Avatar for Voncaster #9 Voncaster 3 years ago
    Great article, its nice to get a business perspective on things.

    Microsoft (MS) has a lot of challenges in front of them. They vastly overestimated their customers brand loyalty from last generation and assumed they could make pro-business / anti-consumer choices with XBOX One and it backfired.

    MS is years behind Apple and Google in the mobile space. Its doubtful they will ever make serious headway there. But as the world increasingly accesses the internet through phones and tablets, their position as minor player here is concerning as an OS maker.

    The latest iterations of Windows are hit and miss. Vista was garbage. 7 basically is fixed Vista. Windows 8 is hellish combination of touch OS and traditional OS in one product that disappoints both camps. Windows remains a cash cow, but only out of years of institutional commitment and not by the excellence of the product itself. I'm not convinced they can maintain institutional dominance in the desktop OS market with a string of middling to bad releases. Eventually consumers will turn on Windows if it continues to flounder.

    MS Office is probably their most competent and best product. It remains the productivity package for most offices. Its been ported to iOS and OS X, and is the second cash cow of their company. Google Docs and Drive form a serious threat to Office however.

    MS balance sheet is healthy, but they have a host of issues that they need to address. XBOX is valuable brand, but given the priorities of OS, cloud integration of OS, mobile and video games, I think video games is the least important to Microsoft's core business.
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  • Avatar for docexe #10 docexe 3 years ago
    @MHWilliams Thanks for the link. So the major shareholders are primarily banks and members of the Yamauchi family. Mmmm… Ok, unless they actually verge into bankruptcy (which won’t happen any time soon), it seems unlikely they will succumb to the pressure, at least on the short term.
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  • Avatar for MHWilliams #11 MHWilliams 3 years ago
    @docexe Nintendo's got a long while before hitting Sega levels, but Iwata can't sustain another two years of consecutive losses. I'm more worried about him being put to pasture and who they'd replace him with.
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  • Avatar for Pacario #12 Pacario 3 years ago
    @MHWilliams I'm playing devil's advocate here, but would replacing Mr. Iwata be a necessarily bad thing? Maybe that's what the company needs--a fresh direction, a new gust of inspiration--to turn its fortunes around. Hard to say, his replacement could indeed be an unfeeling ignoramus, but the captain of a sinking ship can't remain its captain forever.
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  • Avatar for MHWilliams #13 MHWilliams 3 years ago
    @Pacario This is a good point. It can be argued that Nintendo may be better under another President. The problem is it's always a toss-up of who's going to take the top-spot. Will it be someone game-oriented, general media-oriented, or a pure business type? You never quite know.

    It's a "devil you know" kind of situation and Iwata isn't necessarily a devil.
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  • Avatar for docexe #14 docexe 3 years ago
    @Voncaster Very comprehensive about all the threats that Microsoft is facing and how they are slowly losing the dominance they had in the OS space for multiple factors. They certainly need to address many issues (Windows 8 being probably the most pressing).

    Now, I agree that the Xbox isn’t really part of the core strategy, but its value to them has primarily been as a Trojan horse for the consumer goods space and for multiple consumer technologies. I don’t think the idea is bad per se, but it’s an understatement to say that the way they carried out that strategy recently left a lot to be desired

    @MHWilliams Yep! Iwata will have to begin delivering results soon. He has made many missteps recently, but I don’t think he was a bad president overall (then again, Michael Eisner wasn’t a bad president either when he began at Disney). And of course, there is the thing with his recent health issues (I don’t know if it was clarified if the growth was malignant or not, hopefully not, as even if detected and treated early, that kind of things can get recurrent and nasty). In any case, he is not going to be at Nintendo forever. The problem would certainly be “who you put in his place?”

    Personally, in the event that he retires for whatever reason or is fired, I hope whoever takes his place is also game oriented (what I have seen with business types taking control in other Japanese game companies is… well, not pretty). Just more willing to look at the trends in the west rather than remain so focused on the local market. That seems to me like the major Achilles heel Iwata has, honestly.
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  • Avatar for abuele #15 abuele 3 years ago
    Great article, I had the chance to read all the links, in the end is hard cold money talk. You sell when business is good or the least OK, since selling when it is bad, you will get doped in the way.

    Financial analyst love to speculate just judging from the subject's neighbor's moves, what a flop. Now with the new CEO, Microsoft's is focusing on digital media, mobile, the cloud and PC. What's next!!!
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  • Avatar for EnderTZero #16 EnderTZero 3 years ago
    I for one wanted this article to be twice as long. But then I get around and read stuff like Quartz too, so I might be past the USGamer Bell curve in terms of 'interest in Microsoft's business decisions.'

    ETA: read the comments, found my guess not to be the case. I'm proud of us.Edited July 2014 by EnderTZero
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