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Should Microsoft Dump Bing and Xbox?

One analyst is suggesting that Microsoft cut Xbox and Bing to focus on core competency. It's so crazy it just might work.

A financial analyst has gone on record as saying Microsoft would be better off dispensing with Bing and Xbox because they are distractions.

Rick Sherlund, a senior analyst at Nomura Equity Research, recently told GeekWire that by getting rid of Bing, Microsoft could reduce its operating expenses. That much is obvious. Bing is a huge money drain on the company and has cost it billions.

Dumping a money loser is a no-brainer. But he went on to say that Microsoft should also divest itself of the Xbox, which has been a rousing success.

"Xbox is one of the areas of success for Microsoft and is cool to consumers, but it is perhaps time to assess whether this can ever be material to the overall company and might be more leveragable to a consumer-oriented company such as Samsung," he said.

Sherlund predicted a "shift in the wind upcoming for Microsoft," with shareholders potentially demanding a greater say in the direction of the company. If that does finally happen, and I've waited forever for a Microsoft shareholder revolt, then it won't be Bing and Xbox that gets dumped, it'll be Steve Ballmer.

Sherlund posits that if Microsoft could sell or even give Bing to Facebook or Yahoo and eliminate its operating costs and then get a Traffic Acquisition Cost (TAC) back to monetize the traffic that Windows, Windows Phone, Internet Explorer and Xbox Live can drive to Bing, this might generate up to $1 billion for Microsoft, and without the expense.

The thing about the two is that while Xbox has made back its investment and then some, Bing is still very much a negative. In 2012, the company took a $6.2 billion impairment loss related to the search business. And it will report another $1.3 billion loss in operating income in search. Microsoft would have to charge an almost unreasonable sum from any potential buyer, like Facebook or Yahoo.

So I can't see Microsoft just handing over Bing to Facebook or, ironically, Yahoo, the company it tried to buy (and in hindsight, Jerry Yang was right on the money to mightily resist that deal). That's billions, unless there is a big guarantee in place on revenue. Granted, with the positive momentum building for Xbox Live, some momentum for Windows 8 and Windows Phone 8, there could be some revenue potential. And it would be one less distraction for Microsoft.

Xbox is more complicated because it's become a money maker. In the most recent quarter, entertainment and devices accounted for $1.9 billion, 10% of the quarterly revenue. You don't just throw that away.

Sherlund notes that gaming is not that material to the overall valuation of Microsoft and will not likely play much of a role in determining the company's role in the future. "It’s just not profitable enough to move the needle that much at the company," he said. And Microsoft's history with games is sketchy. A few years back, it shut down the long-running Flight Simulator game with no warning, leaving long-time fans crushed. It didn't look for a buyer; it just killed the game.

The sole argument to be made for divesting games, in my opinion, is to eliminate distractions and focus on core competency. And it could be possible that Ballmer's successor will do just that and take a scythe to the place. All of online, games, keyboards and mice, phone and some fringe products would all go, along with the staff, in a cleaning-house and consolidation that is long overdue.

Xbox pays for itself, and as for Bing, the time to give up was two or three years ago. At this point, Microsoft has to remain committed to hopefully get Bing to break-even. That alone will make it an easier sale to Facebook.

Just don't do a stock sale, OK?

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