Steve Ballmer, Microsoft’s chief executive, is on his way out. But he made clear what he thinks his successor should do: Ignore calls to sell the company’s Bing search engine and its Xbox video game console business. Speaking at his final annual shareholder meeting on Tuesday, Ballmer described the money-losing units as vital for the future. Their technology is integrated with other Microsoft products, he said, which helps to make them stand out from rivals.
Ballmer’s comments are aimed at a chorus of critics who say that Microsoft would be better off narrowing its focus after years of disappointing growth and a depressed stock price. What those critics want the company to do is jettison businesses that hemorrhage cash to instead lift profits and provide funds for investing in other areas. Microsoft’s next chief executive will have to at least consider the idea. The ultimate decision won’t be easy, however.
Ballmer, chief executive for the past 13 years, is stepping aside during a challenging time for Microsoft. Once dominant in the technology industry, the company is now under attack by Google, Apple and an array of smaller rivals. Slow to recognize the importance of search and mobile devices, Microsoft now has to play catch-up.
Despite big investments and millions of users, Bing and Xbox have never really made much money. Bing, coupled with the rest of the company’s online properties, has lost billions of dollars over the years. The Xbox’s financial performance is somewhat better but still weak. In the last quarter, the division that includes the video game console along with Surface tablets and Windows smartphones lost $110 million.
Earlier this year, Rick Sherlund, an analyst with Nomura Securities, suggested that Microsoft stanch the bleeding by selling both units and focusing on the core Office software and enterprise businesses. Profits would quickly rise, he said, and help to lift the company’s shares, which are down 40% from when Ballmer took the chief executive job in 2000. While people like the Xbox, Sherlund said, “it doesn’t seem like a good enough business for Microsoft to focus on.” Meanwhile, Microsoft could sell Bing to Facebook or Yahoo, he added.
Stephen Elop, Nokia’s chief executive and a leading candidate to succeed Ballmer, is open to such a sale, according to a recent Bloomberg News report. Citing unnamed sources, the article said that he would divest of any unit he considered to be tangential to the company’s strategy.
Colin Gillis, an analyst with BGC Partners, countered that while “there’s a lot of clamoring” to spin out Bing and Xbox, they are, in reality, too important for Microsoft to get rid of. With a little cost cutting and time, they could both be turned around.
Spinning out the Xbox division would be another bad move, Gillis said. The games console has been a big seller—Microsoft has sold 80 million Xbox 360s, for example—and getting rid of the console would be counter to the company’s strategy of becoming a leader in consumer devices. “We’re going to be a devices company, but our most successful device, we’re going to sell?” Gillis said.
Ballmer didn’t directly address Wall Street pressure to divest certain businesses. Instead, he highlighted the importance of both Bing and Xbox to Microsoft’s overall business. He spoke about Microsoft increasing focus on building “unified” products that are better together than alone. The obvious implication was that product quality would suffer if various units were sold or spun off.
For example, the next-generation Xbox One, which will go on sale Friday, leverages Bing for making queries using natural voice. Ballmer called it “a reflection of what is possible when a company, our company, is unified under a common vision.” Bing is also integrated into Window 8.1, to provide so that users can search the Web, their hard drive or data stored in the cloud.
In general, Ballmer said that the customer data provided by Bing and other services is highly valuable. The information is particularly important for mobile apps, which increasingly rely on a customer’s search history and other user data to provide personalized information. “Owning Bing allows Microsoft to control Web navigation to some extent, to lock out Google on mobile, and to gather tremendous data about what people are looking for online,” said Ross Rubin, an analyst with Reticle Research. Still he said that Microsoft could conceivably sell Bing to Yahoo and license the technology back.
Rubin also gave a mixed assessment of whether Microsoft should sell the Xbox unit. Having a huge installed base of users would be an advantage if the company ever pushes into connected television. But Microsoft’s checkered history with new businesses—it was years ahead of Apple with tablets, after all—doesn’t exactly inspire confidence.