Goldman Sachs: Microsoft should split off 'unprofitable' Xbox dept

Analyst Goldman Sachs has downgraded Microsoft share recommendations from 'buy' to 'neutral', and suggested that one way to resolve the firm's apparent difficulties is to split off its consumer entertainment division.

In a new report (as seen by TechFlash), Goldman Sachs claimed that "A break-up of the consumer businesses could potentially unlock hidden value, or more discipline on cost could turn the businesses into contributors to profitability and shareholder value.

"To date the company's comments suggest that management still sees significant value in combining the consumer and enterprise efforts, but we view a foot in both camps as preventing a successful focus on one strategy, a la Oracle in the enterprise or Apple for consumers.

Clarified Goldman's Sarah Friar, "The Xbox products could be an appealing stand-alone entity, given the historical success of the Xbox and the products' brand strength, and the business could show unlocked value with forced cost discipline compared to as a piece of Microsoft."

Goldman blamed an "elongated PC refresh cycle" and the rise of tablet devices for its 4 per cent lowering of Microsoft's earnings estimates.

To address this, the analyst claimed, Microsoft would need to increase dividends in order to lure more investors, to pursue market leadership in cloud technologies and, damningly, "a coherent consumer strategy that could involve paring back investments and/or divesting more peripheral assets such as gaming."

In Goldman's valuation of Microsoft's various divisions, Entertainment & Devices (which includes Xbox) came out the lowest, at $3.6 billion.

By contrast, Windows/Windows Live was pitched as $107 billion, the business division at $99 billion and servers and tools at $43 billion.

Of the Xbox division, the analyst claimed that "Kinect expands the addressable market and could be key to higher profitability" and "Xbox Live [is] one of the largest paid Cloud communities in existence, offering Microsoft a door into the highly sought after consumer living room."

However, "The division is yet to turn profitable, once corporate overhead is allocated."

While Microsoft has yet to respond to Goldman Sach's recommendations, industry figures have been vocal in their disagreement. " Pulling this off would be like Microsoft learning Geller-ian magic tricks, the equivalent of being able to bend spoons with its brain," said investor Paul Kedrosky.

Added analyst Matt Rosoff to ComputerWorld, "I think it's silly to spin off a profitable business. Xbox would lose more than it would gain by going it alone." Rosoff felt that the company would be better off carving its search business, due to the complexities of competing with Google.

Microsoft share price fell by 2 per cent following Goldman Sach's report.