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Microsoft is d00m3d, can no longer afford to keep investing in Xbox

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Initial post: Dec 4, 2012 6:48:45 AM PST
Point #9 refers to the Xbox brand.

Almost one year ago today, we laid out the nightmare scenario for Microsoft (MSFT) that could lead to its business collapsing. After laying it all out, we concluded, "Fortunately for Microsoft, none of this is going to happen."

We were wrong.

A lot changed in the last year. Microsoft's nightmare scenario is actually starting to take hold. We're revisiting our slideshow from last year to see how things have played out.

Each number that follows has one piece of the nightmare scenario for Microsoft and an explanation of where Microsoft stands in comparison to that hypothetical situation.

1. The iPad eats the consumer PC market.

This is happening right now. In the third quarter of 2012, PC sales were down 8 percent on a year-over-year basis worldwide. In the U.S., sales were down 14 percent. A big chunk of the decline can be attributed to the rise of the iPad. Apple sold 14 million iPads last quarter, which is more than the top PC maker, Lenovo, which shipped 13.7 million PCs. Throw in Apple's 4.9 million Macs, and it's the top computer maker by a mile.

As the personal computer market goes ...

2. Employees gradually switch away from using Windows PCs for work.

This trend has not played out that dramatically in 2012. However, British bank Barclays bought 8,500 iPads at employees' insistence this year.

And a recent survey showed that the iPhone has overtaken RIM as the smartphone of choice for enterprises. As more people get comfortable with Apple's mobile products at work, Microsoft will have to worry about them converting their Windows-based computers to Macs at work, too.

Microsoft has a plan to combat this but ...

3. Windows 8 fails to stop the iPad.

Gulp. It's still early, but every most data points say Windows 8 is not going to make a dent in the iPad.

-- NPD says Windows tablet sales were "nonexistent" between 10/21 and 11/17. -- It also says Windows sales were down 21 percent over that period on a year-over-year basis. -- Piper analyst Gene Munster was in a Microsoft store for two hours on Black Friday and saw zero Surface sales. -- Microsoft reportedly cut its Surface order in half. -- Ballmer said Surface sales were "modest."

Meanwhile, we can't think of any analyst who has cut his or her iPad estimate for the quarter based on Surface sales. In Microsoft's defense, it says it sold 40 million licenses, which it says is out pacing Windows 7. There's a chance analysts are wrong.

4. Loyal developers start to leave the Microsoft platform.

We're not sure if this happening or not. So far, the early signs are actually positive for Microsoft. It has over 20,000 apps in its Windows app store. Windows 8 is only a month old. At the same time, Microsoft doesn't have a Facebook app for the Surface, and one of the biggest complaints from reviewers was the lack of good apps for Windows 8.

Windows Phone has over 100,000 apps, but iOS has 700,000 apps, with 275,000 made specifically for the iPad.

5. Windows Phone gets no traction despite the Nokia deal and RIM's collapse.

This has happened. Despite everything Microsoft has tried in mobile for the last two years, consumers aren't buying it. The latest data from IDC says Microsoft has 2 percent of the global mobile market share. And the latest phone from Nokia is thick and heavy compared to phones from Apple and Samsung. We don't expect it to be a blockbuster.

Suddenly, all the dominoes are in place for a lot of bad things to start happening. ...

6. Office loses relevance.

Microsoft's Office has been a juggernaut. In fiscal 2012, the Microsoft business division did ~$24 billion in sales.

Last year, we cautioned, "Office runs only on Microsoft platforms and the Mac. As employees start to do more and more work from non-Windows smartphones and iPads, companies may start to question why they're still buying Office for every employee and upgrading it every two or three releases."

The death of Office, has not happened, though. Despite Google's attempt to create Docs, companies aren't giving up on Excel.

7. Microsoft's other business applications start to erode.

If Windows continues to fade, and if Office starts to fade, then corporations have less reason to adopt Microsoft technologies on the back end like Exchange Server for email, SharePoint Server for collaboration, Lync for videoconferencing and real-time communication, and Dynamics for CRM and accounting.

Exchange, SharePoint, and Dynamics all bring in more than $1 billion per year, and Lync is Microsoft's fastest growing business application. Plus, they pull through a lot of other Microsoft products. ...

8. The platform business collapses.

For the last decade, Microsoft's fastest growing business segment has been Server & Tools, which did $7.4 billion in sales last year.

A lot of these sales come because Microsoft business apps - Exchange, SharePoint, and Dynamics - require these products. But as companies stop buying these apps, they will have less reason to buy the Microsoft platform products that run them, and the System Center ($1 billion+) products used to manage them.

9. The Xbox was never going to make up the slack, and Microsoft can no longer afford to keep investing in it.

In a year of relative gloom, Microsoft's Xbox has become a big bright spot for the company. Kinect is great technology, people are still buying the console, and it's been a great entry point for Microsoft to take over the living room. But, for a company like Microsoft, Xbox isn't enough. Microsoft had $21 billion in operating income last year. The Entertainment and Devices division, which is home to the Xbox had $364 million in operating income. So, as nice as Xbox is, it's not going to be enough to boost Microsoft if the rest of the business collapses.

10. Microsoft suffers a huge quarterly loss. Ballmer retires to play golf.

Let's not kid ourselves - it's going to take a sudden, unexpected disaster at Microsoft to get Ballmer out of the company.

In 2012, Microsoft had its first ever quarterly loss as a public company because it had to write down the $6.2 billion acquisition of aQuantive. Investors mostly shrugged. If Microsoft posted a real loss people would freak out. But that's going to be nearly impossible in the near term.

In the long term ...

Is this just a bad dream?

Last year, we concluded by saying, "Fortunately for Microsoft, none of this is going to happen. Windows 8 will reassert the dominance of the Windows PC. Office and other business products will remain corporate necessities, and developers will never be able to ignore Microsoft. Windows Phone will become a viable third mobile platform, the Xbox will continue to dominate the living room, and new products will surprise the pundits who thought Microsoft couldn't innovate. Even Bing will finally make a profit someday."

This year, it's a lot harder to say much of that. Windows 8 doesn't seem to be reasserting the dominance of the PC. Windows Phone is not a viable third platform. Bing is still burning money. The Microsoft nightmare scenario is actually becoming a reality.

Posted on Dec 4, 2012 6:49:46 AM PST
I.Flores says:

Posted on Dec 4, 2012 6:51:25 AM PST
Benpachi says:
So I take it that Gold won't be free any time soon?

Posted on Dec 4, 2012 6:51:52 AM PST
JJ4prez says:
I find this article has no idea what it's talking about when it comes to Microsft and Video games.

Posted on Dec 4, 2012 6:52:27 AM PST
So basically this is an editorial. Cool story to whoever wrote it. I wrote some stories as a child as well.

In reply to an earlier post on Dec 4, 2012 6:54:37 AM PST
JJ4prez says:
"Microsoft had $21 billion in operating income last year."

Totally contradicts everything he/she said.

Posted on Dec 4, 2012 6:56:55 AM PST
JWK says:
Does anyone here own a Windows phone? How are they? I've still never met anyone who owns one and I'd like to take a look at it.

Posted on Dec 4, 2012 6:57:05 AM PST
Cinema Fan says:
McClane's on suicide watch.

In reply to an earlier post on Dec 4, 2012 6:57:54 AM PST
JJ4prez says:
Everyone I know that has one is obsessed with them.

Posted on Dec 4, 2012 6:59:08 AM PST
got mayo?™ says:
Microsoft doom and gloom editorials are always something new and fresh.

In reply to an earlier post on Dec 4, 2012 6:59:48 AM PST
Same here. They keep bringing theirs into my office to tell me what 'cool' apps they have.

I've seen one cool app so far, otherwise I think they're just happy they get a new one once in awhile...

In reply to an earlier post on Dec 4, 2012 7:11:32 AM PST
D_Strasse says:
How so?

They said Xbox was a bright spot for the company. Is that wrong.

As to the gist of the point, Xbox NEVER really made sense for MS. They aren't hardware manufacturers and they home entertainment is tricky space in general. Apple still ahsn't figured it out. Plus where are the long term profits? Content or content delivery?

A company like MS needs growth, and so a large company needs to look for growth in large spaces. Videogames was never a space that was large enough to supply that growth. It works in PC because is supports that platform and so the Xbox is somewhat synergistic in that area, but investors that want returns need bigger things plain and simple.

Posted on Dec 4, 2012 7:15:20 AM PST
Oskar2525 says:
Crap, and I just became an Xbot...

In reply to an earlier post on Dec 4, 2012 7:16:05 AM PST
The UI on those phones really does look amazing. I'm considering getting one for my next phone.

In reply to an earlier post on Dec 4, 2012 7:17:19 AM PST
So let's say all this is true, I would think MS would really need to hold onto their Xbox devision since it sounds like it's the area doing best.

Posted on Dec 4, 2012 7:18:12 AM PST
M. McFly says:
So they can no longer afford to invest in something that is making money? If xbox was a money losing that statement could make sense. Does that person not really understand on dumb that sounds. We can't afford to invest $1b to get that $1b back plus $300M on top of that. Joke. Also clearly this person has no understanding of branding, msft is such an "uncool" and 'hated" company xbox is actually changing their image. Regardless yes msft is facing so major headwinds but this did a terrible job of pointing that out.

In reply to an earlier post on Dec 4, 2012 7:21:30 AM PST
D_Strasse says:
Profitable divisions can be shut down when they aren't producing revenue or growth streams in alignment with ROA/ROI.

Investors can simply become antsy and demand core business be shored up before (in comparison mildly) profitable subdivisions are attended to.

In reply to an earlier post on Dec 4, 2012 7:21:46 AM PST
RJMacReady says:
Employees switching to tablets and smart phones is going to erode office???

Writer has no idea.

In reply to an earlier post on Dec 4, 2012 7:25:29 AM PST
D_Strasse says:
A lot of businesses don't need full on PCs - smart phones and tablets can do a LOT of what small laptop can do. And Apple is winning in the segment and the longer term trend is stealing share.

Will PCs in businesses go away completely? No, but the point is growth, revenue and share - the stuff that gives investors pause.

Posted on Dec 4, 2012 7:25:50 AM PST
i think some confusion surrounds the surface, the rt version will not run any legacy software, if you want to run it you will have to wait for surface pro and its $799 price tag. I think MS is still a friendly company compared to Darth Apple. I am considering a win 8 upgrade, and would like to demo a win phone.

In reply to an earlier post on Dec 4, 2012 7:25:53 AM PST
Fantastic OS. Absolutely great.

Problem is the app support is crap.

In reply to an earlier post on Dec 4, 2012 7:27:27 AM PST
GUEST!! says:
So what was all that you were saying about how Jason never posts d00m and gl00m threads about MS?

In reply to an earlier post on Dec 4, 2012 7:31:03 AM PST
The article mixes stuff that has happened with stuff that might happen. Horrible journalism.

In reply to an earlier post on Dec 4, 2012 7:32:59 AM PST
Last edited by the author on Dec 4, 2012 7:49:47 AM PST
RJMacReady says:
Really? I don't know of any that get by on tablets and smartphones. What tablets and smart phones can't do are things businesses need.

A lot of businesses are using tablets in addition to computers. They have limited usefulness though. Last time I went to the dentist, they had me sign in on an iPad. For that kind of thing, they are great. They are hardly going to spell doom for MS's business business.

In reply to an earlier post on Dec 4, 2012 7:47:38 AM PST
D_Strasse says:
What I'm saying is that people in the field like sales reps and retail clerks can get by with phones and tablets for a lot of tasks and then consolodate info on fewer PCs back at headquarters or in the back office.

It isn't getting rid of PCs but shifting some of the work done on them to more portable and useful solutions in the field. which all has the effect of reducing teh number of licenses MS sells. Not to mention drives the need for greater compatibility through the multiple deveices.
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Discussion in:  Video Games forum
Participants:  36
Total posts:  93
Initial post:  Dec 4, 2012
Latest post:  Dec 4, 2012

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