Microsoft Should Have Spun Off Xbox. Good Thing It Didn’t (Premium)

Many industry pundits have called on Microsoft to spin off Xbox over the years. And they were right to do so, too: Xbox has siphoned money out of Redmond at an alarming rate of several billion dollars per console generation since its inception.

But then something happened, as we say in the Microsoft community.

That something, of course, is cloud computing. And while its impact on gaming and Xbox is just beginning to be felt, the ramifications of Microsoft’s broad, corporate-wide embrace of cloud computing have impacted the whole company in obvious ways, from its sudden love of open technologies, methodologies, and interoperability with rivals and their platforms, to AI and even accessibility. If you had to just use one word to describe this change, it would be open: Today, Microsoft is open to everyone. And to everything.

This transition predates Satya Nadella’s ascension to the CEO role at the company. But it’s fair to say that Microsoft’s drive to become more open has only accelerated and expanded over his five years in charge. Which is what makes the firm’s continued support of Xbox so interesting: As is the case with HoloLens, Mr. Nadella clearly saw a bright future for a business that had, to date, been mostly a costly distraction. And, again as with HoloLens, that future involves evolving the business to embrace all of the new Microsoft’s core values and strengths.

Like any hardware business, video game consoles are a risky, low-margin affair. And, in Microsoft’s case, they have delivered almost 20 straight years of financial losses: Each Xbox console generation that Microsoft created cost several billion dollars in R&D, and that money will never be recouped. As bad, Microsoft has lost the first two console generations in which it competed from a marketshare (unit sales) perspective, and it is on its way to losing the third.

Most incoming CEOs would have evaluated this history, observed how terribly Xbox One had been received, and would have immediately begun plans to spin off or sell the business. That Nadella didn’t do that is interesting, given the ruthlessness with which he handled other money-losing businesses, like Windows Phone, and other doomed-to-fail products like Surface mini. Someone or some group at Xbox---with Phil Spencer as the key figure, most likely---was able to convince Nadella not only that Xbox had a future, but that it was key to the future of Microsoft itself.

I know. That sounds ludicrous on the face of things. But the history is clear. Nadella handed Xbox to Spencer in 2014 and then elevated his status even further by promoting him to executive vice president and placing him on his Senior Leadership Team alongside his then-boss Terry Myerson. His place on Microsoft’s version of the Star Chamber means that Nadella trusts him to help navigate Microsoft’s future. And that he has Nadella’s ear and support. Thus, so does Xbox.

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