Will Microsoft's Release Of Xbox One Trigger Another Rally?

| About: Microsoft Corporation (MSFT)

Microsoft (NYSE: MSFT) announced on May 21 the upcoming release of its new generation Xbox gaming console, the Xbox One. It will be packed with loads of breakthrough features that will probably raise the gaming entertainment standard to a higher level. The scheduled release date is not set yet, but it could be anytime later this year. While the Xbox One will surely rock the gaming console industry, will this be enough to trigger a rally of Microsoft shares?

For the past weeks, Microsoft rallied and gained 7% month-to-date. Year-to-date growth is a whopping 27%. The announcement on the upcoming release of Xbox One may further boost the current rally, but whether the actual launch will trigger another rally or not, that remains to be seen.

The gaming console is just a part of one major segment of Microsoft, which is the entertainment and devices division. This segment contributes about 12% of the total revenue and only 4% of the company's net income. Aside from the Xbox 360 entertainment platform that includes the Xbox 360 games and Xbox Live, Skype and Windows Phone are part of the segment.

The major revenue drivers of Microsoft are the business division, the Windows division, and the server and tools division. The Microsoft business division is the main revenue and income contributor of the company. This division accounts for 30.8% of the company's total revenue during the first quarter of 2013. It generated $6.319 billion during the period.

The main component of this segment is the Microsoft Office system, such as the Microsoft Office, the Office 365, Lync, and SharePoint. This contributes about 90% of the revenue of the division.

The entertainment and devices division, on the other hand, posted $2.531 billion in revenue for the quarter. The total revenue of Microsoft during the period was $20.489 billion, up 17.7% versus the year-ago quarter revenue of $17.407 billion.

In terms of earnings, the Microsoft business division is still the major earnings driver. It posted $4.104 billion net income compared to the $342 million earnings of the entertainment and devices division. Microsoft's net income for the quarter was $7.612 billion, up 19.4% compared to the previous year first quarter earnings of $6.374 billion.

But in spite of the minute contribution of the entertainment division relative to the business division, it is still a major segment of the company. Any dips and lows in sales and revenues can affect not only the financials of Microsoft but the share price, as well. That is why the upcoming release of Xbox One is an event to watch for, especially among the shareholders, as well as traders planning to invest on Microsoft shares.

Key Features of Microsoft Xbox One

One of the major highlights of Xbox One is the all-in-one home entertainment system. It is not just a game console like the WII of Nintendo (OTCMKTS:NTDOY.PK) and the PlayStation 3 of Sony (NYSE: SNE). With this feature, the Xbox One can be connected to the TV and to various devices.

It is further equipped with a fully redesigned Kinect camera that lets you control different devices through hand gestures and voice command. You can literally turn the game console on by just saying the word 'Xbox On.'

The same is true if you want to check the local TV listings, or switch to games, movies, and music. You can also set the console to 'snap mode' that lets you run different programs altogether in one screen. Xbox One will be powered by an 8-core CPU with 500 GB hard drive and 8 GB of system memory. It comes with a Blu-ray drive, as well.

One major drawback of the new game console is its incompatibility to the previous Xbox versions. So it will not be able to run Xbox 360 games because the hardware platform is totally different. This will probably get negative reactions among die-hard Xbox fans. However, the fully enhanced gaming entertainment that the next generation games will provide will arguably offset the drawback. Gamers will experience a new level of entertainment that will make them glued to their seats for more hours of gaming.

There will be a handful of new game titles coming up from EA and Activision (NASDAQ:ATVI). This includes the Forza 5, UFC, FIFA 14, and NBA Live, among others. Activision will also release the 'Call of Duty: Ghosts' through Xbox One.

To further add spice to the excitement, Microsoft will tap on the expertise of the legendary movie maker Steven Spielberg to create 'Halo: The Television Series.' This will be aired exclusive only to Xbox One, giving game lovers all the more reasons to purchase the new game console for their entertainment needs.

The Gaming Console Industry

While many people are excited about the upcoming launch of Xbox One, the gaming console industry is slowly shrinking amid the rising popularity of Android games that come at cheaper prices. Console games cost an average of $60 per game. There is higher possibility that the price will go up to $70 per game for the next generation games that come with better quality.

The average costs of game apps, on the other hand, start from $0.99 to $20 per game, and people spend almost the same hours or even more playing games on their Android-powered gadgets against game consoles.

Aside from price, mobile convenience sets Android games apart from console games. You can practically bring your games along with you wherever you go, and you can play your favorite games during idle times of the day. This is one thing that game consoles can't provide.

These issues will remain a tough challenge for the declining game console industry, leading to sharp decline in sales of game consoles in the US. Total sales generated only about $4 billion, down 21% over the previous year. Likewise, console games suffered the same fate, shedding 18% from $11 billion in 2011 to roughly $9 billion in 2012.

According to a report, only about 29% of hard-core gamers will make the purchase of the next generation console games of Microsoft or Sony once they are released. While this figure is not accurate given the fact that many will eventually be convinced to make the purchase once the exciting features are unveiled, this is a sign that foretells the declining interest on console games nowadays.

If the above data is used as a benchmark, the estimated increments in sales of the new Xbox will be minimal, and it may probably not significantly affect the future total revenue and earnings of Microsoft.

Remarkable decrease in revenue of the business division, as well as the Windows division and the servers and tools division, will have greater impact on the company's financials. So, more focus must be given on the performances of these segments when evaluating the financials of Microsoft.


Xbox One may have the best features one can get from a game console, but many game fanatics are now migrating to Android games due to lower costs and convenience. While the release of Xbox One later this year will boost the sales of entertainment and devices division of Microsoft, shares may go up for a while but not probably enough to gather adequate momentum to ignite another rally.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.