Microsoft dead-set on mobile and games after shake-up

By Bill Rigby – Analysis

SEATTLE (BestGrowthStock) – Microsoft Corp’s (MSFT.O: ) move to shake up the leadership of its mobile and games division this week — giving Chief Executive Steve Ballmer direct control over the push to catch up with Apple Inc (Read more about Apple stock future.) (AAPL.O: ) and Google Inc (Read more about Google Stock Analysis) (GOOG.O: ) in the exploding smartphone market — revealed its determination to ride the next wave of computing.

Few expect a change of management to turn the entertainment and devices unit into an iPhone-killing, Wii-slaying profit machine overnight. But Microsoft — known for its deep pockets and ability to assimilate new technology — won’t stop pouring money into the mobile and gaming sectors.

“Failure is not an option,” said Sid Parakh, technology analyst at McAdams Wright Ragen in Seattle. “Android and the iPhone have got so far ahead, it’s going to be a hard, uphill battle. But it’s something they have to do.”

Several years ago, Microsoft pinned its future on what it called “three screens and a cloud” — the television, personal computer and phone, all connected by the Internet.

“Mobile is a critical piece of that,” said Parakh. “We are all doing more and more on our handheld devices.”

The software firm has work to do to regain its place in the smartphone market, having sunk to fifth place worldwide, behind Google’s Android, Apple’s iPhone, Research in Motion Ltd’s BlackBerry (RIM.TO: ) and Nokia’s (NOK1V.HE: ) Symbian system.

Microsoft’s new Windows Phone 7 system, which will start appearing on phones this holiday season, could be the last chance for Microsoft to keep its place in consumers’ hearts and minds as new ways of computing take hold.

People are doing more on their non-Windows smartphones and less on their largely Windows PCs. Apple’s iPad — rolled out to nine more countries on Thursday — is a hit and hardware makers are rushing out competing tablet devices, mostly on non-Windows platforms.

Even Microsoft’s old ally Hewlett-Packard Co (HPQ.N: ) is striking out on its own, buying Palm Inc (PALM.O: ) to use its operating system on its forthcoming ‘slate’ devices.

“This is their last chance. If they are not successful this time, it’s not going to matter,” said Jack Gold at tech research firm J. Gold Associates. “But they’ve got a big war chest. They can stay in this space forever if they choose to, if they want to subsidize it.”


The retirement of 48-year-old Robbie Bach, the long-time leader of the entertainment and devices unit, means that the executives in charge of games and phones — Don Mattrick and Andy Lees respectively — will report directly to Ballmer.

Ballmer is likely to be pushing them every inch of the way. Launching Windows Phone 7 in Barcelona this year, he underlined the importance of the market to Microsoft.

“We talk about a strategy that says three screens and a cloud, and the phone is absolutely one of the critical screens,” he said in February.

The entertainment business is in a stronger position, providing most, if not all, of the $851 million operating profit the unit made in the first nine months of Microsoft’s current fiscal year.

Microsoft has sold 40 million of its Xbox 360 consoles and says it has 23 million paying subscribers for its Xbox Live network, letting users play each other in real time.

After considerable investment, Xbox Live is now the best example of a genuine money-making “cloud” computing business Microsoft has, Parakh said, and has gone some way to fulfilling its vision of Xbox as the hub for living room entertainment.

“The Xbox division has been on fire since Don Mattrick got there,” said Wedbush Securities analyst Michael Pachter. “Xbox Live is really wildly profitable.”

The Xbox still lags Nintendo Co’s (7974.OS: ) Wii console in monthly sales, but Microsoft hopes to change that when its hands-free, motion-sensing Natal comes out this holiday.

Not all analysts support Microsoft’s push. Entertainment and devices is only the fourth biggest of Microsoft’s five operating units, behind its Windows, Office and server units.

Though on track to post more than $8 billion in revenue this fiscal year, that’s still under a tenth of Microsoft’s $62 billion or so annual revenue. Last quarter, it contributed only 3 percent of the company’s operating profit.

Microsoft would be better off dumping the unit to focus on its core Windows and Office units, say some shareholders.

“The error is even if they do succeed, there’s almost zero chance of it being a large enough business to impact a company the size of Microsoft,” said Bill Smead, chief executive of Seattle-based Smead Capital Management, whose funds hold about $10 million worth of Microsoft shares.

Still, the view on Wall Street seems to be that Microsoft needs to keep working at the consumer business.

“There are not many adjacent areas of tech that can help Microsoft meaningfully add to its $62 billion annual revenue. Consumer electronics is one of the few that could move the needle for them,” Katherine Egbert at Jefferies & Co said in a note to clients this week. “We don’t expect Microsoft to abandon the consumer market and play only defense.”

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(Additional reporting by Franklin Paul in New York; Editing by Edwin Chan and Richard Chang)

Microsoft dead-set on mobile and games after shake-up