It’s been just a week since Microsoft’s announced that it’d hired Satya Nadella to lead its efforts to unify products and operations across its software, hardware and services divisions. Now some Microsoft investors are calling for the new CEO and slightly updated Board of Directors to cancel consumer-focused business like its Xbox One gaming console and more.
A new report cites activist hedge fund ValueAct and Mason Morfit, an investor ValueAct was able to get on Microsoft’s board by purchasing 0.8 percent of all its publicly available shares, as two investors who are pressuring the company to focus on businesses. The Washington Post goes so far as to imply that it would make more sense for Microsoft to rid itself of businesses like Xbox and Bing and focus only on corporate and business software creation.
It’s a route that’s been suggested for Microsoft ever since the company’s business-focused products started gaining traction while consumer-focused business outside of Windows and Office stalled. With Bing, Xbox and services like SkyDrive, the report attempts to paint a picture in which Microsoft would directly market itself to user by releasing and seeking to profit from the $10.4 billion that Microsoft Research spends on developing future breakthrough products. It even cites a former company employee as having said that many of Microsoft Research’s projects are ground-breaking but don’t “see the light of day if it doesn’t fit into one of the company’s existing offerings.”
Of course, the reasons listed in the report and ValueAct’s claims of Microsoft heading in the wrong direction don’t make sense entirely.
For starters, Microsoft’s consumer and business products mostly exist in a symbiotic relationship. That is, development on one product often has both consumer and business applications. For example, Microsoft’s Windows Azure platform, which is geared towards business professionals, powers products like the Xbox One cloud compute service the developers use to create more in-depth online-dependent titles. Code for Windows 8, Microsoft’s consumer-oriented operating system, is also at the heart of its Windows Server products. Even the Xbox One, which most see as just game console, can be used as a replacement for the cumbersome telemarketing products currently in use by business today thanks to its Kinect 2 sensor, something that Microsoft Research had a heavy hand in developing.
It also ignores rising revenue from most of Microsoft’s consumer business. High sales of the Xbox One, and Surface tablets led to record quarter at Microsoft recently.
Furthermore, Microsoft’s figures for research and development indicate that the company spends 10.4 billion on research and development company-wide.
Most importantly, both the report from The Washington Post and statements made by ValueAct ignore the reality of Microsoft’s position in the business space today. Cutting off any access to consumers directly would leave the burden for future growth at the feet of Windows Azure, Windows Server and presumably Office and Windows. By some estimates Windows Server, Office and Windows have arguably reached the point where serious earnings growth beyond what the company makes today, is an impossibility. However, a modest success with a consumer service, hardware or software product could mean substantial gains for Microsoft’s earnings.
Update Representatives for Microsoft have informed GottaBeMobile that the $10.4 billion The Washington Post’s report first indicated Microsoft spent on Microsoft Research specifically includes costs and engineers dedicated to actual shipping products too. We’ve updated our story to reflect this information.