The Microsoft Entertainment and Devices division will lose the services of Robbie Bach, its president, who according to Microsoft is retiring from the company. J Allard, senior VP of Design and Development will also leave Microsoft, but remain as a strategic adviser for the company.
The press release is gushing in its praise, but we’ve been asking this question for some time, Is the Entertainment and Devices Division really contributing anything to Microsoft, apart from keeping its hand in technologies where it is seen as a failure.
It’s around an $8 billion business annually, which makes almost zero contribution. Last quarter revenue was $1.67 billion and operating income was $165 million, or 10%, compared with the $2.87 billion, or 65% of the Windows division. This after having some ridiculous amount of money spent on it, measured in $billions and approaching 10s of $billions over the years. It’s revenue grew 2% over last year, and it moved from an operating loss to its current, small operating margin.
But within that, Xbox revenue decreased 5% over last year, as Xbox console shipments began to begin their slide down their normal life-span into yet another, expensive R&D program for the next device. Analysts have already noted that the PS3 from Sony has another 7 or 8 years of growth left in it, simply because the system began expensive, and hard to write games for, but it is immensely more powerful than the Xbox 360 and it can skip a generation of development. Even Xbox game revenue is already falling and the only really good thing that Microsoft has done here is get more people online onto its Live network, than rivals, which may help it survive the fact that it backed the wrong HD DVD standard and its consoles remain without onboard Blu-ray devices, purely out of Bach’s hubris.
In the meantime non-gaming revenue at the division decreased $80 million or 4%, primarily reflecting decreased sales of Window Mobile device platforms and Zune digital music and entertainment devices.
The Mediaroom IPTV division of Microsoft barely gets a mention in the Microsoft accounts, except to say that it defers a lot of its revenues, and these are not broken out.
Sure, the division has a decent Zune device finally, but it’s not selling, and also it has managed to impress with its recent Phone 7 OS version, but these lines have to be considered failures at this point, and as effusive as Ballmer’s praise of his friend Robbie Bach is, we don’t buy it ‘ this could signal the start of either tidying house in this division, and either cutting off some of the product lines, selling them off or letting them wither ‘ or fixing their problems.
As for a replacement for Bach, well there isn’t one. Don Mattrick will continue to lead the Interactive Entertainment Business and Andy Lees will continue to lead the Mobile Communications Business and both will report directly to CEO Steve Ballmer, effective July 1.
Does that mean that these numbers will be separated and broken out in future accounts? In which case Microsoft would have every right to pile more and more resource behind the most intense of these battles, which is the mobile division, and to renew assaults on mobile advertising and other areas of potential mobile wins, while it might move to make all of the other divisions at least try to pull their weight in terms of margin, with the inevitable whiff of cost cuts in the wind.
‘For the past 22 years, Robbie has personified creativity, innovation and drive. With this spirit, he has led a division passionately devoted to making Microsoft successful in interactive entertainment and mobility,’ Ballmer said. ‘Robbie’s an amazing business person and close personal friend, which makes his departure a point of sadness for me. However, given the strong leadership team he has built, the business performance of E&D this year and the launches of Windows Phone 7 and ‘Project Natal’ this fall, we are set up well for success as we continue to drive our mobile and entertainment businesses forward.’
Even if Ballmer means these words honestly, investors will be bringing Ballmer under pressure to squeeze better margins out of this division or slim it down.
Mattrick came out of Electronic Arts, and is behind the only significant development at Xbox since his arrival in 2007, the much-anticipated ‘Project Natal’ which will introduce controller free gaming, using gestures and spoken commands, which has yet to be launched. So he might continue to reach into pure R&D at Microsoft and drag out some surprises, while Lees has a real fight on his hands, keeping up with Android and the iPhone developments, especially their App Store appeal, and given he is not even a phone man, but a 20 year Microsoft veteran from the server division, is almost certain to continue the Microsoft tradition of failing dramatically in mobile.