Microsoft Should Give XBox Biz to Nintendo

Microsoft Should Give XBox Biz to Nintendo

Microsoft has a new CEO. And a new Chairman.  The new CEO says the company needs to focus on core markets.  And analysts are making the same cry.

Amidst this organizational change, xBox continues its long history of losing money – as much as $2B/year.  And early 2014 results show that xBox One is selling at only half the rate of Sony’s Playstation 4, with cumulative xBox One sales at under 70% of PS4, leading Motley Fool to call xBox One a “total failure.”

While calling xBox One a failure may be premature, Microsoft investors have plenty to worry about.

Firstly, the console game business has not been a profitable market for anyone for quite a while.

The old leader, Nintendo, watched sales crash in 2013, first quarter 2014 estimates reduced by 67% and the CEO now projecting the company will be unproftable for the year.  Nintendo stock declined by 2/3 between 2010 and 2012, then after some recovery in 2013 lost 17% on the January day of its disappointing sales expectation.  Not a great market indicator.

The new sales leader is Sony, but that should give no one reason to cheer.  Sony lost money for 4 straight years (2008-2012), and was barely able to squeek out a 2013 profit only because it took a massive $4.6B 2012 loss which cleared the way to show something slightly better than break-even.  Now S&P has downgraded Sony’s debt to near junk status.  While PS4 sales are better than xBox One, in the fast shifting world of gaming this is no lock on future sales as game developers constantly jockey dollars between platforms.

Whether Sony will make money on PS4 in 2014 is far from proven.  Especially since it sells for $100/unit (20%) less than xBox One – which compresses margins.  What investors (and customers) can expect is an ongoing price war between Nintendo, Sony and Microsoft to attract sales.  A competition which historically has left all competitors with losses – even when they win the market share war.

And on top of all of this is the threat that console market growth may stagnate as gamers migrate toward games on mobile devices.  How this will affect sales is unknown.  But given what happened to PC sales it’s not hard to imagine the market for consoles to become smaller each year, dominated by dedicated game players, while the majority of casual game players move to their convenient always-on device.

Due to its limited product range, Nintendo is in a “fight to the death” to win in gaming. Sony is now selling its PC business, and lacks strong offerings in most consumer products markets (like TVs) while facing extremely tough competition from Samsung and LG.  Sony, likewise, cannot afford to abandon the Playstation business, and will be forced to engage in this profit killing battle to attract developers and end-use customers.

When businesses fall into profit-killing price wars the big winner is the one who figures out how to exit first.  Back in the 1970s when IBM created domination in mainframes the CEO of GE realized it was a profit bloodbath to fight for sales against IBM, Sperry Rand and RCA.  Thinking fast he made a deal to sell the GE mainframe business to RCA so the latter could strengthen its campaign as an IBM alternative, and in one step he stopped investing in a money-loser while strenghtening the balance sheet in alternative markets like locomotives and jet engines – which went on to high profits.

With calls to focus, Microsoft is now abandoning XP.  It is working to force customers to upgrade to either Windows 7 or Windows 8.  As PC sales continue declining, Microsoft faces an epic battle to shore up its position in cloud services and maintain its enterprise customers against competitors like Amazon.

After a decade in gaming, where it has never made money, now is the time for Microsoft to recognize it does not know how to profit from its technology – regardless how good.  Microsoft could cleve off Kinect for use in its cloud services, and give its installed xBox base (and developer community) to Nintendo where the company could focus on lower cost machines and maintain its fight with Sony.

Analysts that love focus would cheer.  They would cheer the benefit to Nintendo, and the additional “focus” to Microsoft.  Microsoft would stop investing in the unprofitable game console market, and use resources in markets more likely to generate high returns.  And, with some sharp investment bankers, Microsoft could also probably keep a piece of the business (in Nintendo stock) that it could sell at a future date if the “suicide” console business ever turns into something profitable.

Sometimes smart leadership is knowing when to “cut and run.”

Links:

2012 recognition that Sony was flailing without a profitable strategy

January, 2013 forecast that microsoft would abandon gaming

 

Overcoming Hurdles and Growth Stalls – Microsoft vs. Apple

Sustaining growth is really hard.  Consulting firm Bain & Company just published the statistic that only 12% of companies were able to grow revenues and profits more than 5.5% from 1998 to 2008 (read more in the Harvard Business Review downloadable book excerpt Profit from the Core.) Given that all companies want to grow, it seems remarkable so many stall.

But while most managers blame lack of growth on the economy, truth is we can learn a lot from those who DID sustain growth.  What doesn't work, and what does, can be found by starting with a great OpEd column about Microsoft published in The New York Times "Microsoft's Creative Destruction." Former Microsoft Vice President Dick Brass provides insight to why Microsoft has become a market laggard in new products – despite enormous revenues, profits and new product development spending. Calling Microsoft "a clumsy, uncompetitive innovator," he says products are "lampooned" and the company is "failing." Harsh words. 

He points out that profits are almost entirely from legacy products Windows and Office.  "Microsoft has lost share in Web browsers, high-end laptops and smartphones. Despite billions in investment, its Xbox line is still at best an equal contender in the game console business."  He explains how internal managers set up false hurdles, often claiming quality was the primary issue, for ClearType and a tablet PC. He claims the internal executives "sabotaged" new projects and he blames inability to meet market needs on "internecine warfare."

But all of that could be said about Apple as well. It once was just like Microsoft.  In the 1990s Apple stopped everything but new Macs from making it to market.  Remember that the first PDA (personal digital assistant) was Apole's Newton? Killing that product became a priority for several Apple executives, and caused the ouster of then CEO John Scully

So the Microsoft described behaviors can happen anyplace. When organizations begin to focus on Defending & Extending their "core" business it leads to hurdles and growth stalls. "Operational improvements" leads to "focusing" on doing what the business always did, perhaps just a touch better (like a next generation operating system [Vista], or a new variation on Office [2007].) The culture, decision-making processes and operating cost model all are geared to doing more of the same. Without intending any downside, in fact in pursuit of improved competitiveness in the "core" products, the business begins erecting hurdles to doing anything new, or different

This problem isn't limited to Microsoft  Although we can clearly see the impact and feel pessimistic about Microsoft's future. It has afflicted many companies, and is why they cannot adjust to market shifts. Even if loaded with executives and enormous budgets for R&D, technology or marketing. Don't forget how Apple looked even worse than Microsoft in 2000.

And that's why so few companies maintain growth. The desire to do more, better, faster, cheaper of what we've always done is overwhelming. Defending & Extending the existing business always looks marginally better, and marginally less risky, than doing something new, or different. In trying to maintain growth by getting better at what you've always done – you kill it.

Why? Because Defend & Extend management does not take account of market shifts. New products, new competitors, new technologies, new business models, new customer approaches — the list is endless of variations which competitors bring to the marketplace. And these variations change the market. Trying to stay on the same course becomes suicide when customers begin moving on.

And that's where Apple has excelled. When Steve Jobs took over he quit trying to Defend & Extend the Mac platform. To the contrary, he reduced the number of Mac models.  Instead of planning based on old market share and sales, he pushed a rigorous scenario planning exercise to create a robust view of future markets – and what needs customers would like solved. He then led Apple to study competitors, both in-kind and on the fringe, to identify new markets being developed and new solutions being tested.  He then Disrupted Apple – by cutting the Mac platforms and investing heavily in other market opportunities like music (iPod and iTunes).  And he encouraged product managers to rush new products to market in order to obtain market feedback, using White Space teams to rapidly learn what would sell. And he repeated this again and again, agreeing to a joint development project with Motorola before entering into mobile phone testing and launch (iPhone.)

Microsoft's proclivity toward D&E management is putting its future at grave risk. All signs are it will become another fateful, negative statistic. But it doesn't have to be that way. Microsoft can learn a lesson from its resurrected competitor and follow The Phoenix Principle. It can escape from xBox, and other new product, second-tier status if it will get a lot more robust about scenario planning, quit acting like the only game in town and start obsessing about competition.  Disrupt its culture and decision making, and start using White Space to rapidly get new products in the market and learn how to match them with market needs to succeed!