Microsoft keeps quiet, but the numbers say change is needed

As far as you could tell from Microsoft's earnings call, there's no such thing as a new Xbox being planned. In fact, little attention was paid to the Entertainment & Devices Division, either by Microsoft executives or by analysts.

Microsoft execs had more important things to accomplish on this call than building excitement for a new console. They had to try and spin the results so that the fact of lower income on more revenue looked reasonable, and that Microsoft's prospects for the future are looking up, not down.

Look at the numbers: In the same quarter last year, Microsoft had $17.41 billion in revenue with $6.37 billion in income. This year, $20.49 billion in revenue with only $6.06 billion in income. Spending is up as Microsoft tries to transition away from a PC-dominated world to a future of cloud services (which includes Xbox Live), Surface tablets, and Windows smartphones.

Meanwhile, the Entertainment and Devices Division posted revenue of $2.53 billion, an increase of 56 percent (33 percent when adjusted for deferral of video game revenue in an accounting change) from the prior year period, which is pretty good considering the overall rough year for the console business. "Xbox sold 1.3 million consoles and maintained its share position in a soft console market," Microsoft said. "We continuously look for ways to improve Xbox Live for both our members and our partners. We saw transactional revenue grow roughly twice as fast as member growth this quarter." In other words, Microsoft was doing better at selling stuff on Xbox Live than it was at signing up new members. The company also noted that Xbox Live has grown some 18 percent from where it was last year.

Analysts focused their questions on the chances for Surface tablets to start selling better; Microsoft noted increasing distribution and hinted at new models in the future. Sales of Windows smartphones have improved, but the numbers are so small compared to iOS and Android that it's not significant yet - and it may never be.

What about next quarter, and the next fiscal year? Microsoft said only that it expects revenue to grow in the mid-teens next quarter, and that we would hear more about next year in the next few months. "Xbox continues to be at the center of our living room strategy," Microsoft said. "E3 is only a few months away, and we look forward to sharing more shortly."

"E3 is only a few months away, and we look forward to sharing more shortly"

Microsoft

Clearly Microsoft doesn't want to steal any thunder from its presentation at E3, or a possible pre-E3 unveiling that's been rumored. At some point, though, you have to wonder if Microsoft is really expecting its next console to have a major effect on the company as a whole. It may be huge for the console market, but can Microsoft use its next Xbox to sell more Surface tablets, Windows smartphones, or copies of Microsoft Office?

That seems unlikely. Microsoft's Windows 8 has been roundly criticized for attempting to bridge the gap between tablets and PCs, while satisfying neither market particularly well. Still, Microsoft was making progress on its vision of Windows everywhere, on PC, tablet and smartphone, with a common interface. Now that the next Xbox is rumored to be based on a PC architecture, and the Xbox Live interface is already resembling the new Windows interface, we are more likely to see common elements between all of Microsoft's hardware markets.

Certainly it makes sense if Microsoft can make money selling movies and music and games, it would do better to sell those for all possible platforms. Apple and Google have clearly shown the overall benefit of roping customers into an ecosystem. Once you've got someone hooked on one device (a phone or a tablet or a PC) it becomes much easier to convince them to buy other devices that work together seamlessly, and even share content. Microsoft can see the advantages of adding a console to that list of devices.

Unfortunately, so can Apple and Google. They have no standing in the console market as yet, but that can change quickly. Meanwhile, Microsoft is struggling to gain traction for its tablets and smartphones, while its greatest strengths (in PC and console) continue to erode. Ultimately the next Xbox, while it may never sell on the scale of a smartphone, could have an outsized impact if it can help boost Microsoft's tablet and smartphone business somehow.

That's unlikely to come about purely as a result of hardware innovation. Microsoft will need to keep up with the trends in business model innovation as well, and lower barriers to developers in order to get broader support. Sony has already made it clear that the PS4 will be much easier to develop for than the PS3, both in its technology and in the way Sony does business with developers. We need to find out if Microsoft can meet or beat Sony's bid for market dominance.