Microsoft should sell off its Xbox and consumer arm, according to a research note from Goldman Sachs.
The financial analyst today caused surprise as it downgraded Microsoft from "buy" to "neutral," criticised the company's efforts in mobile computing, and urged the company to separate its consumer business from its enterprise arm.
The research note, which was publicised by Bloomberg, got a nod of acknowledgement from Steve Ballmer, speaking in London this morning. The main message from the Microsoft CEO, however, was that the company would need time to make money from its cloud computing operations.
In addition to proposing the separation of Microsoft’s enterprise and consumer activities, Goldman Sachs analysts attacked Microsoft’s efforts in the mobile market just a week before the launch of Windows Phone 7.
The company isn't likely to make any headway in mobile this year because "Apple's iPad and iPhone plus Google's Android operating system are well established," the analyst said.
The analysts also warned that Microsoft faced problems because of longer corporate PC refresh cycles and the likelihood that tablets, where Microsoft doesn’t have a proposition will cannibalise sales of laptop and netbook devices, where Windows does have a presence.
Goldman Sachs’ call for Microsoft to spin off its consumer was challenged by Matt Rosoff, an analyst with Directions on Microsoft. "I understand the reasoning behind [Goldman Sachs'] idea, but I think it's silly to spin off a profitable business. Xbox would lose more than it would gain by going it alone," Rosoff said.
Rosoff added, "Rather than talk about Xbox, what about Bing and its search business? Microsoft's there to put pressure on Google , but with Bing, the argument isn't about whether it's profitable, because it's not, but about how much can Microsoft spend, and how long they can keep spending."
Other recommendations by Goldman Sachs' Friar got support from Rosoff, including boosting the dividend the company pays stockholders. Friar urged Microsoft to "materially increase" its dividend to make its stock more attractive to a larger number of investors.
"Microsoft should do that," Rosoff said. "Their cash flow is outstanding, and with the amount of revenue they generate, they could increase the dividend significantly."