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Community News: Goldman sacks Microsoft

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Shares of Microsoft fell slightly after an analyst, Sarah Friar at the global investment banking and securities firm, Goldman Sachs downgraded the software giant on Monday (October 4, 2010). It appears that Microsoft’s shares has been downgraded from “Buy” to a “Neutral” rating, with an accompanying drop in the share price from $32 to $28. I’m sure a number of you are probably wondering how this would impact Microsoft’s gaming division, and the prognosis is certainly grim.

Amongst a series of recommendations to help improve investor confidence in Microsoft, Friar recommends:

“A coherent consumer strategy that could involve paring back investments and/or divesting more peripheral assets such as gaming”.

It is seemingly plausible that Microsoft may consider pulling the plug on their gaming division, as pressure mounts for the ailing company to deal with inevitable investor pressure. We should also remember that Microsoft will be anxious to improve their standing with Goldman Sachs, considering that, if we take into account grade inflation, a “neutral “rating is a kin to a “sell rating” in this economic climate (i.e. the current recession). This is a situation that Microsoft will try to deal with as soon as possible, and investment firms will be watching with ruthless abandon.

This is not great news for gaming, since if Microsoft is forced to abandon their gaming division, it would mean less competition, and gaming in particular will suffer for it.

Source: BusinessWeek

Last Updated: October 5, 2010


  1. Funny story this. Was it last week that MS just signed up new bosses in the gaming division? And I don’t see why MS would pull out of gaming because they are snug in second place and are expanding the Xbox Live’s gaming experience to mobiles this year.


  2. lans

    October 5, 2010 at 09:33

    lol you gonna be very sad in the near future fox, ill be there for youuuuuuuuuuuuuu uuuu u u u u. Dont you cryyyyy yyyyyyy, theres always gonna be a pppppp sss 3333!!


  3. Bobby Kotick loves James

    October 5, 2010 at 10:07

    @Fox1 Not so long ago, Balmer had to take a substantial cut in his bonus, because there was investor unhappiness about the mobile (phone) and media arm of Microsoft. I would assume Goldman Sachs’s downgrade will be hitting them very hard.

    This is not about being second in the gaming market or the fact that xbox live has been profitable, but ultimately… to what extent investor confidence has been exhausted, by recent mistakes. The overall cost of the xbox (which surpasses the profits so far),it’s flurry of issues all adds up, and Kinect throws another question mark up in the air, but the problem here is that their gaming division is not separate but rather seen as a part of their media arm (which includes the phones, media players etc.). It might mean that Microsoft will have to go back to basics, and Goldman Sachs’s recommendations are to ultimately refocus on software (particularly the Office suite – as market share has been lost in that regard).

    Regardless of whether or not Microsoft reorganises and keep their gaming division, I will be very surprised if Balmer survives this storm.


  4. Bobby Kotick loves James

    October 5, 2010 at 10:17

    That in itself would be a pyrrhic victory, because regardless of whether you love or hate Microsoft, much like Sega and a series of other companies in the past, they offered competition to the major players. The PS3 and its games are a direct result of having to compete with Nintendo and Microsoft this generation, and although I may not like the xbox anymore and Microsoft has been playing dirty pool, it pushes innovation. I seriously doubt we would have had Uncharted or Infamous or even an updated and stunning looking GT5, without Microsoft.


  5. Fox1

    October 5, 2010 at 10:24

    Well that’s a pathetic recommendation coming from a top company.

    And who ever at MS gave the go-ahead with those 2 phones seriously should be fired(that same guy you mentioned). MS are also taking alot of flak for not selling the Zune worldwide.

    There’s so much left in the balance with Windows Phone 7.


  6. Bobby Kotick loves James

    October 5, 2010 at 10:36

    There were a flurry of recommendations which involved all sectors of Microsoft. I highlighted gaming as it’s of interest to us and relevant to this site.

    Obviously, there is always a risk when you venture into a new market and the smartphone sector was always going to be a tough one. On paper, Microsoft should be able to make an impact, however the market is saturated with Symbian, Android, Blackberry (RIM) and Apple. It was always going to be a tough battle.

    The Zune faltered before it could get out of the gates, and Microsoft’s search engine is struggling to capture interest as well, so overall the company has been running up a steep hill.

    My take on this, and please note, I’m not in any way business-inclined (brushes the hippie hair out of his face), but Microsoft has severely overextended itself, and Balmer will have to take these recommendations (plural) very seriously, otherwise we might see the collapse of a once Software Behemoth.


  7. Gavin Mannion

    October 5, 2010 at 10:47

    You make solid arguments Bobby but I can’t see Microsoft collapsing anytime soon.

    In reality there is no one who can take their place on either the OS, dev tools or Office market at the moment and any pretender to the throne will need years of development before it can become a realistic competitor.

    While they have made massive mistakes recently (Kin, Vista) it is important to remember that Windows 7 is a roaring success and the new Office 2010 is top class.

    Also the dev tools are far and away the best in the business, nothing comes remotely close.

    The entertainment division is a long shot for Microsoft that I can imagine them dropping… but not at the whim of Goldman Sachs and not in the next few years.


  8. Bobby Kotick loves James

    October 5, 2010 at 11:10

    The demise of Microsoft has been predicated by more than a few analysts, pseudo-analysts, EU politicians, linux fanbois and the general public for the last 20 years.

    I doubt they’ll collapse either, and Friar did recommend that they return to basics (i.e. refocus on OS and Office) to boost their ratings again. The problem however is the recession, a neutral rating at any other time would still be a positive, however with banks and investment banks collapsing in the US over the last few years, and investors being on the edge, a neutral rating is seen as a sell rating. The last thing Microsoft needs is for investors to start liquidating (especially with the share price dropping).

    I think Microsoft has been aware of this issue for the last few years, and If you’ve noticed they have been closing down their internal gaming studios, presumably to curb investor concerns.

    However for the most part, it seems they’re trying to ride the turbulent recession wave, with an aggressive strategy (the new phone, Kinect, Zune, bling etc.) with the hope that the recession will end soon.

    I think the reason they’re pushing so hard for Kinect is that it will either break or holster their gaming division.

    It’s ballsy and risky, but if they can capture the casual market it means profits, if not, it means there won’t be an Xbox 720.


  9. Steve Hofmeyr

    October 5, 2010 at 11:11

    MSoft started to turn a yearly profit a while ago so to me it would seem stupid to pull the plug as soon as the profits start rolling in.
    Sony on the other hand, are still to see any profits from the PS3, they are still making a loss year on year from their division which houses the PS3. Not to mention they erased PS2 profits already. PSN+ is a weak attempt at getting the same returns as XBL. Move sales isn’t groundbreaking. To me it seems like the question mark should be on the Sony gaming division and not MSoft.


  10. Steve Hofmeyr

    October 5, 2010 at 11:13

    Msoft collapsing while they own the majority OS market share is not going to happen.


  11. Bobby Kotick loves James

    October 5, 2010 at 11:19

    @Steve – Considering that Microsoft is a listed company, it’s success hinges on investor confidence, after all, investors are more interested in the share price and whether their portfolios are growing. Whether or not Microsoft posted a profit last year, is immaterial to whether an investor considers their investment to be sound.

    Do you understand what I’m saying?


  12. Gavin Mannion

    October 5, 2010 at 11:27

    Absolutely I think the possibility of a Xbox 720 has now been pushed back a bit from 100% to 90% but in reality with the division being profitable and the excitement around the Windows 7 Phone building it would be suicide for Microsoft to cut that department now.

    I do agree on Kinect as well and as I have said many times I think it’s going to do really well.. not with us core gamers but with the larger market.

    I am excited to see how it goes, whether they fail or not is immaterial in the long run, as long as they keep us entertained while they do it :biggrin:


  13. Bobby Kotick loves James

    October 5, 2010 at 11:42

    If Apple can plough back from their disastrous run in the 90s (do you remember Newton?), then it’s definitely possible for Microsoft to ride the wave.

    Anyway, if you view everything in context, it actually makes sense that they would increase the subscription fees of Live?


  14. Fox1

    October 5, 2010 at 11:55

    After the economic crisis I take my advice from economic analysts and investors with a pinch of salt :ninja:


  15. Bobby Kotick loves James

    October 5, 2010 at 12:02

    The financial crisis wasn’t caused by economic analysts or investors but rather by American and European banks who overextended themselves and ended up unable to recoup profits. In other words, their banking system collapsed. :happy:


  16. Steve Hofmeyr

    October 5, 2010 at 12:06

    Profits, among other things, influences share price so I don’t agree with what you are saying.


  17. Bobby Kotick loves James

    October 5, 2010 at 12:17

    And yet, when Microsoft posted a profit in April, their share price dropped. Ericcson also posted a profit over their second quarter over this period, yet saw their share price erode as well.

    The reason for that is generally opportunistic sells in the wake of increased profits, and the expectation of a bump in share prices, unfortunately if too many folks sell or sell too quickly, your share price actually plummets, which given already shaky investor confidence, it can domino out of control.


  18. Bobby Kotick loves James

    October 5, 2010 at 12:23

    However, the meat of Microsoft’s woes are related to managing their investors and cultivating a sense of investor bliss and this is where Balmer has to go on the offensive and really stick his neck out. He will need to sell his vision to them, and so far he’s been struggling.


  19. Fox1

    October 5, 2010 at 12:35

    Um…who do the investors work for @Bobby? :dizzy:


  20. Nick de Bruyne

    October 5, 2010 at 12:58

    I actually remember hearing similar stories about Sony and the Playstation brand, but these companies don’t give up so easily, the push to get through so we will see what happens. How the Kinect story unfolds will be very interesting.


  21. Bobby Kotick loves James

    October 5, 2010 at 13:33

    lol, yes banks invest too but there’s nothing nefarious about it, where the bubble really burst was not because investments bottomed out like in 1929, but rather that American banks were relying too heavily on credit. They went into debt themselves to cover the loans that they were giving out to consumers.


  22. Gavin Mannion

    October 5, 2010 at 13:34

    And Google posted record profits and their share price dropped…

    All in all I don’t think these analysts have a clue about what they are talking about


  23. Steve Hofmeyr

    October 5, 2010 at 13:36

    And how far would share prices have fallen if they didn’t post a profit? You are arguing that profit has nothing to do with share prices which doesn’t make sense. Investors will have more confidence in a profitable company than in a company that’s losing money.

    Further, I doubt the fall in MSoft share price was related to opportunistic sells as you put it.

    Look, I’m no economic expert, but to me it seems like you’ve put your own subjective spin on this story. It’s no secret that you prefer Sony which is fine but I don’t agree that Msoft will kill off a division that’s turning a profit. XBL is like a cash cow for MS and killing of the gaming division will kill off XBL.

    Your prediction that we may see the collapse of MSoft any time soon is even more insane given their OS market share. If anything, you may see some restructuring and consolidating. I’ll gladly put my foot in my mouth if I’m wrong.

    And FFS, please don’t give lans false hope, he’s so fragile.


  24. Bobby Kotick loves James

    October 5, 2010 at 13:38

    Sony’s interesting in that they’re still riding the storm, and Japan has never really recovered from the Asian markets crash of the late 90s. Point is, Sony and Nintendo have been riding the wave since the 90s, and modern American businesses have never had to struggle this much. This is new territory for them, and guess who will have an advantage? *Looks sheepishly at Sony and Nintendo*

    I think as gamers we overestimate the xbox’s worth to Microsoft, from an investor point of view it’s a liability, and whether Microsoft plays it hard or face criticism from their investors is really where it’ll get interesting.


  25. Bobby Kotick loves James

    October 5, 2010 at 13:47

    Ugh! Predicted!! lol when can we get an edit button please 😛


  26. Bobby Kotick loves James

    October 5, 2010 at 13:55

    @Steve: I never said that Microsoft was going to collapse, merely that if they do not heed Goldman Sach’s recommendations which will improve their rating again, they may collapse. In addition, in a reply to Gavin I said “I doubt they’ll collapse either…”

    As for being a rampant fanboi, this was my reply to Ians:

    “That in itself would be a pyrrhic victory, because regardless of whether you love or hate Microsoft, much like Sega and a series of other companies in the past, they offered competition to the major players. The PS3 and its games are a direct result of having to compete with Nintendo and Microsoft this generation, and although I may not like the xbox anymore and Microsoft has been playing dirty pool, it pushes innovation. I seriously doubt we would have had Uncharted or Infamous or even an updated and stunning looking GT5, without Microsoft.”

    And yes, Microsoft’s drop in share price in April (after they posted a profit) was because of opportunistic sales, you can easily google this fact. As for the current drop in share price, this is because of the downgrade by Goldman Sachs.


  27. Nick de Bruyne

    October 5, 2010 at 14:05

    I think that the profits generated from Xbox Live are what keeps Microsoft in the game


  28. Bobby Kotick loves James

    October 5, 2010 at 14:32

    @Nick Definitely in the gaming arena, but what keeps the company afloat is undeniably Windows 7.


  29. xXDarfuurXx

    October 5, 2010 at 15:38



  30. Bobby Kotick loves James

    October 5, 2010 at 15:43



  31. Nick de Bruyne

    October 5, 2010 at 15:45

    Lol Bobby, you “HAZ A SMALL PENIZ”


  32. Uncle

    October 5, 2010 at 15:46

    HAHAHA best article comment ever. Absolute trash and meaningless but the inference to the small ‘peniz’ is just too awesome.

    I think MS stocks would take a harder knock if they scrapped their gaming division than if they kept it.


  33. Bobby Kotick loves James

    October 5, 2010 at 15:47


    @Darfur: lol dude


  34. Nick de Bruyne

    October 5, 2010 at 15:56

    @Bobby, yeah I was talking about the gaming division


  35. Bobby Kotick loves James

    October 5, 2010 at 15:56

    @Uncle, they’ll probably have to shift it away from mobile phones and other peripherals and try to convince their investors that their gaming division is an integral part of Microsoft. In any case, they’ll have to drop something, or Balmer could just push forward, and hope that Kinect delivers.


  36. Uncle

    October 5, 2010 at 15:59

    I wouldn’t really be sad if their mobile division drops. If share holders think getting out of the gaming market is going to bring it profits they are sadly mistaken!

    Gaming is too big an industry to ignore, any investor worth his salt knows this!


  37. easy

    October 6, 2010 at 09:55

    @bobby & fox

    the financial melt down (which is still happening) was a result of the federal reserve’s actions. investor confidence is strictly controlled by the fed’s policies which in turn regulates what the banks do. it’s an ugly mess and massively complicated.

    on a side note, it’s worth keeping in mind that goldman sachs is one of three major banking institutions that legislate, control and audit the federal reserve. so bobby is right, ms would do well to heed their recommendations… this is without going into any conspiracy theory 😉


  38. James Kotick

    October 6, 2010 at 12:59

    That’s really the point really, the recession is still very much a reality, which means a share price downgrade is very serious.


  39. Axe99

    October 7, 2010 at 01:31

    I haven’t read all the comments word-for-word, but I think you’re all getting a little over-excited. ‘Divest’ means to sell or spin-off, not shut down. More detailed reports have noted that Goldman recommends continuing the profitable Xbox business, but in a separate company (possibly wholly owned by MS, possibly sold off to someone else), to allow MS to refocus its core business plan (which Goldman sees the Xbox as confusing – MS is a large, multifaceted conglomerate, and there are times when it makes sense for organisations like this to refocus).

    But at _no point_ did Goldman suggest the Xbox should cease. Calm down lads ;).


  40. N4G

    October 7, 2010 at 11:53

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