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Is Microsoft set to spin off the Xbox?

An article published by Bloomberg at the end of last week speculates that with Ballmer leaving, there's a very real possibility that Microsoft will spin off the Xbox division sooner rather than later.

I'm a proponent of busting Microsoft into four to six entities, and this is a good start. Some analysts see the proposed Xbox Corporation being valued at around $17 billion (£11 billion) right out of the chute.

As Bloomberg noted:

Ballmer's retirement as chief executive officer may clear the way for a potential spinoff of the Xbox unit to unlock shareholder value. While a consumer success with $7 billion in annual sales, it's one of Microsoft's lower-margin divisions and doesn't drive sales of the company's core business services and software. Xbox may be worth at least $17 billion on its own, based on Nintendo Co.'s revenue multiple, according to data compiled by Bloomberg. Its value should be even higher given that Nintendo has operating losses, Wedbush Inc. said.

When you really think about it, the Xbox is unlike anything else Microsoft does. The company stuck with this product and developed a winner by actually being patient for a change. But still, the profit margins are not there insofar as Microsoft is concerned and it might just be spun off to make the books look better.

The immediate drawback would be that over in the US, Microsoft stores rely on the Xbox for a good portion of their sales and profits. It's possible a deal could be struck so the stores always guarantee the Xbox a place on the shelves and the new Xbox Corporation will agree to supply the stores with machines on some priority schedule. In fact, the Xbox channels are already well-established so the Microsoft stores will just be icing on the cake.

The new company might actually benefit by not having to meet or exceed the ridiculously high margins achieved by the software business. In fact it may even flourish without the ogres in Redmond complaining about profit margins.

Spinning off might also allow for more inventive Xbox peripherals, which normally get killed off by the mother company.

But where will the money-making Kinect end up? It makes no sense to keep it with Microsoft and it cannot become a company unto itself. It has to go with the Xbox Corporation.

So how likely is this split up? The Bloomberg article goes on to point out:

Whether Microsoft decides to part with some business units will come down to who it chooses to be the next CEO, Schwartz of Schwartz Investment Counsel said. 'If they choose an insider to replace Ballmer, I would say a breakup is still unlikely,' he said. 'But if they go the other route and get someone from outside the company who has an open mind and is willing to shake things up, I could see them breaking this up. It makes sense.'

Microsoft has not been grooming any particular heir to the throne, which indicates to me an outsider will indeed be brought in. That means the potential for the Xbox spin-off is real.

And that might suggest other spin-offs are coming too. Let's hope so.