Is it time for Microsoft to dump Xbox and Bing?

By Preston Gralla

Microsoft just unveiled its next generation of Xbox, but there's a call from a prominent analyst for Microsoft to sell it off, along with the Bing search engine. Has the analyst been smoking something funny, or is his call the right move?

Xbox 360, bing voice search

Nomura Equity Research analyst Rick Sherlund's most recent note recommends that Microsoft sell both the Xbox and Bing Businesses, according to GeekWire. GeekWire reports that Sherlund wrote about the Xbox that it "doesn't seem like a good enough business for Microsoft to focus on."

Later on in the report, he said of the Xbox:

"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. Perhaps they would be willing to pay several billion dollars for this to leverage their substantial consumer electronics business?...[Xbox] is not that material to the overall valuation of Microsoft and will not likely determine the success of Microsoft going forward; it's just not profitable enough to move the needle that much at the company."

He also thinks that Microsoft should dump Bing, claiming that "from an ROI and strategic perspective" Bing doesn't make sense. He believes selling Bing would eliminate costs, and generate $1 billion in profits, and then concludes:

"If this were returned to shareholders, this could add nearly 1% incremental to the dividend yield, in our estimation."

Sherlund's analysis and recommendations focus on one thing, and one thing alone: boosting Microsoft's stock price and dividend payout in the short term. If that's the goal, then he has a point. Microsoft can probably get top dollar for its market-leading Xbox, and getting rid of Bing will certainly rid Microsoft of a short-term money-loser.

But a Microsoft without Xbox and Bing is a Microsoft that ultimately will become a second-tier technology company. The goal today among the biggest tech companies isn't merely to sell software and hardware -- it's to tie people into their ecosystems of services, media content, hardware, software, shopping, and mobile. Only those companies with broad-based ecosystems will be able to compete. So the fight today is among Microsoft, Google, Apple, and Amazon.

Without Xbox and Bing, Microsoft doesn't have an ecosystem. Xbox isn't just for gaming, it's also for delivering music, video, and other media, and trying to take over the living room. Bing isn't just for search. It's also for shopping, mobile and more.

And keep in mind just how big the gaming market is. Microsoft estimates that it's a $65 billion market. Walking away from that sized market would be a mistake.

So while it's true that in the short term, selling off Xbox and Bing could boost Microsoft's stock price and dividend payout, it's a long-range losing plan. It's hard to imagine Microsoft following Sherlund's advice.