This Will Be The Last Console Generation

| About: Microsoft Corporation (MSFT)

Microsoft (NASDAQ:MSFT) pulled off fairly phenomenal sales for its first day launch. Props to Microsoft for being classy enough to congratulate Sony (NYSE:SNE) on its success! Sony returned the sentiment to Microsoft as well.

Microsoft sold out the Xbox One on the day of launch. The lineup of games, paired with the multimedia features gave Xbox enthusiasts plenty to be happy with. In the last generation, a $100 price differential had a more significant impact. But this time around it seems that it hasn't.

Microsoft announced how thrilled it was with its launch, selling over a million units on the first day. That's a lot of inventory to move around, so running short on supply should be no surprise. But hopefully, the supply chain managers at both companies get it right in the next console generation if there is indeed one.

With consumer discretionary spending up, and demand for electronics roaring back to the forefront. I knew that the two companies may have underestimated demand. It is a little early in the console generation. But, defending the living room has remained a priority for both Microsoft and Sony. This is because the living room may be contested by Apple in the foreseeable future.

Will Microsoft spin off the Xbox segment?

Source: Statista

It has been 7 to 8 years since Microsoft and Sony have released a console system. The fact is, Microsoft and Sony could have charged significantly more for the hardware but chose not to. Both businesses want to earn profits from software rather than hardware. Because of this, many have criticized the business, and some within Microsoft want to spinoff the Xbox division.

To be specific, Stephen Elop, a contender to be the CEO of Microsoft, is rumored to believe that selling the Xbox and Bing division of Microsoft could help to keep the company on track. However, that same Forbes article points out that there's plenty of logic that would run counter to Stephen Elop selling the Xbox and Bing division.

Stephen Elop has a terrible track record as CEO of Nokia. To be more specific, over his three year tenure at Nokia, Nokia's revenue fell by 40%, profits fell by 95%, and smartphone market share fell from 34% to 3.4%. Let's assume, the Verge was right about Stephen Elop's plans of selling the Xbox and Bing unit. That alone should give the board ample reason NOT to hire Stephen Elop. Stephen Elop has a terrible track record of winning in the ONE product category he had control over - mobile. I can't imagine how he's going to succeed at running the disparate parts of Microsoft's vast empire.

The probability of Microsoft selling Bing and Xbox is not only small - it's infinitesimally small. There aren't that many businesses in the world that operate at similar scale to Xbox and Bing. The Bing and Xbox segments alone could be separately listed on the S&P 500. Microsoft needs these two segments to effectively complement its One Microsoft strategy. Building a huge product ecosystem helps to insulate Microsoft from both Apple and Google. To be more exact, both Apple and Google are bigger threats to Microsoft than Sony will ever be.

That being the case, we have to think that if Bing and Xbox were sold off, it would not only hurt the brand, but it would also diminish Microsoft's ability to effectively transition users from Windows 7 to Windows 8. While the Windows 8 functions very effectively and doesn't have that many software issues. Users prefer the old Windows layout over the new one. However, by standardizing the experience across all form factors, (mobile, television, desktop, laptop, and tablet) the core Windows experience may continue to survive. Plus, if Microsoft can continue to maintain its respectable position in tower and laptop PCs, and gain share in mobile and tablet, the company may become a more formidable force.

Sure, Bing may never have the same amount of market share as Google. But it's still growing at a pretty steady clip. Plus it doesn't hurt that Bing has been gaining market share in the United States against Google. This is all thanks to Microsoft's mobile operating system using Bing. By 2020, 75 billion different devices will be connected to the internet, according to Morgan Stanley. Of those 75 billion devices, Microsoft needs to capture as many as possible. To do this will require synergy across all of its business segments, which is why Microsoft should be building a larger moat around its ecosystem rather than selling different pieces of the castle it has worked so hard to build.

Will there be a next generation console?

Yes, and no. I think this question is really difficult to answer. Generally speaking, making long-term predictions can be difficult. But the fact is computing is becoming more invisible. Going forward, the key differentiator would have to be the software that comes with hardware. This puts greater emphasis on the three emerging ecosystems: Windows, iOS, and Android.

I don't consider Sony to be a complete ecosystem, and quite frankly it's starting to acknowledge its own weakness in the technology space. The fact that it can't transition any of value from some of its business segments to other business segments is a problem. I don't get why Sony has both a bank and a consumer electronic division under a single umbrella. Some have pointed out that it should spin off its entertainment division (music and movies). But in reality, the banking part of the business should be the part that should go. This is because banks and technology companies are managed extremely differently. Sure, it may be Sony's only profitable segment, but it doesn't change the fact that banks are heavily regulated. How could added regulation make things any easier for Sony's management team?

If anything, Sony is the ultimate OEM (other equipment manufacturer). But being a great OEM without great software is terrible. The more an ecosystem can scale the better. As Larry Page from Google has said, technology spending doesn't scale that easily! Instantly creating products would be nice, but it's simply not feasible. Hence the fat cash piles on Google's balance sheet. Sure you can start by shoveling money, but if you just throw money at product development without a very well thought out business strategy, what's the point?

It sounds almost silly, but Sony will sell computers rather than televisions. To be more specific a Sony Bravia television may not be a simple cable and movie viewing experience. Sony may have to partner with Google, and develop a Sony Bravia television that runs Android. And with 75 billion devices connecting to the internet by 2020, we have to assume that the average person will own 7 to 8 devices that can access the internet. The TV will become one of those devices.

However, to do this effectively, Sony will have to put an end to its PlayStation gaming division. Perhaps, sell games, but sell them to a much larger ecosystem - the Android ecosystem. In this transition, Sony will earn vastly more profit from blockbuster video game titles, plus sell a television that is an all-in-one computer, and gaming device.

However, some have speculated that the standard ecosystem of gaming will come under attack because of the cloud. After all, if you can access hardware via the internet, problem solved, right? Not quite, this is because the data that's being transferred from your web connected device is limited by the bandwidth of the internet connection. However, some may add that you can simply increase bandwidth to solve the issue right?

No, not exactly, the PlayStation 4 can handle 176 GB/s of data transfer on its RAM (random access memory). Short-term memory is the bridge between the processor and the hard drive. Currently, 4G LTE networks can transfer data at around 100 MB/s, which is a far cry from the 176 GB/s of data transfer capability on a Sony PlayStation 4. This further implies that streaming a video game's graphics from a mainframe PC is a very remote possibility. There could be technological workarounds, but I doubt Microsoft and Sony will cloud stream and abandon a lucrative hardware business.

If anything combining a console system with a television is most likely. And plus, it's vastly more profitable. By the time 2018 to 2020 rolls around, I can only imagine the limitation of bandwidth to be further crippling. This is because the data transfer between processor, graphics, and storage will become substantially faster. Bandwidth and memory transfer on a board will advance at a far greater rate than with network technologies (Fiber optics, 5G LTE). Therefore, it's improbable to think that games will simply stream from the cloud.


Both Microsoft and Sony were able to successfully launch their consoles. However, Microsoft seems to have come slightly ahead by selling the same number of consoles at a full $100 more than Sony. It's unlikely that Microsoft will sell its Bing and Xbox One division. This is because Microsoft is trying to build its own ecosystem across all form factors. To sell any of the businesses would run counter to the one Microsoft strategy.

Going forward Microsoft and Sony will try their best to protect their turf in the living room. However, to accomplish this, Microsoft will have to partner with a television maker and learn to sell Windows on a 50" to 60" screen. To accomplish this, Microsoft has overhauled its operating system (Windows 8). By standardizing the operating system across all form factors, Microsoft may be able to release a next generation system that is integrated into a television. This new device will operate as a console, TV, and computer. This will be an all-in-one device.

Now, for Sony… since Sony doesn't have its own ecosystem. I imagine a scenario where it will have to partner with Android. Then build its next generation console into every Sony television that is sold. It will earn its profit from software, without having to incur financial losses from the hardware. Also, it can't hurt that Sony will have broader distribution to casual gamers and may even port over console titles to smartphone and tablet devices.

So in the end, this is the last console generation that comes in the form of a box for Microsoft and Sony.

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.