Goldman Sachs Recommends Microsoft Split Off Xbox Business

Analysts at investment firm Goldman Sachs have suggested that Microsoft should "carve out" the company's profitable Entertainment and Devices division, including the Xbox 360 business, from the rest of the company. In a report released over the weekend and excerpted by TechFlash, the investment firm suggested that the profitability of Microsoft's consumer-facing division are being hurt by overhead from the larger corporation, and that splitting the division's products off into a new organization could "unlock hidden value." "For example, 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," the report suggests. "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," it continues. Despite enthusiasm about the Xbox 360's prospects in the wake of the upcoming launch of the Kinect motion controller, Goldman lowered Microsoft's overall rating from "buy" to "neutral" in the report, citing the threat of tablet PCs and cloud-based computing, areas in which Microsoft is not dominant. After years of losses during the original Xbox era, Microsoft's Entertainment and Devices Division finally achieved profitability in fiscal 2008. The division's profits recently grew to $679 million for the most recent fiscal year, largely on the strength of Xbox 360 business. Aside from video games, the Entertainment and Devices Division also includes Microsoft's Zune music player business and the company's Windows Phone 7 and Windows CE mobile operating system businesses.