Microsoft should split off Xbox division - Analyst

Goldman Sachs investor note advocates corporate restructuring at software giant to make game business its own entity, freeing it from Entertainment and Devices slump.

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Microsoft's financial performance during its April-June quarter was nothing less than stellar, with company-wide profits spiking 48 percent to $4.52 billion on revenues up 22 percent to $16.04 billion. However, delving beyond those top-line figures, Microsoft's Entertainment and Devices division fared less evenly. While its Xbox-led games business saw revenue grow 30 percent to $228 million, the division as a whole slid 22 percent and took a $172 million loss.

Goldman Sachs believes Xbox should strike out on its own.
Goldman Sachs believes Xbox should strike out on its own.

With Microsoft primed to release its earnings report for the July-September period later this month, Goldman Sachs has issued a dour investor note on the company, one that advocates a significant restructuring of its business units. As relayed by Seattle-focused industry blog Tech Flash, analyst Sarah Friar believes Microsoft would be well served by "carving out" its Xbox division into its own entity.

"A break-up of the consumer businesses could potentially unlock hidden value, or more discipline on cost could turn the businesses into contributors to profitability and shareholder value," Friar wrote. "For example, the Xbox products could be an appealing stand-alone entity, given the historical success of the Xbox and the products' brand strength, and the business could show unlocked value with forced cost discipline compared to as a piece of Microsoft."

"To date the company's comments suggest that management still sees significant value in combining the consumer and enterprise efforts, but we view a foot in both camps as preventing a successful focus on one strategy, a la Oracle in the enterprise or Apple for consumers," the note continued.

Of particular note, Goldman Sachs sees substantial potential for the Xbox 360's camera-based motion-sensing add-on Kinect, saying that the device has the ability to broaden the Xbox 360's market. However, the investment firm went on to note that the Entertainment and Devices division will continue to struggle with profitability until it can better manage the corporate overhead that's currently weighing on the segment.

Beyond Xbox and PC gaming, Microsoft's Entertainment and Devices division also includes the handheld media player Zune, as well as the stillborn mobile effort Kin and Windows 7-based phones.

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