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What the Xbox really is
A recent Wall Street Journal article noted that while Microsoft's cash position is enviable, it does present some challenges; management can't find enough ways to spend the cash. For example, unlike computer chip manufacturer Intel Corporation (another huge generator of cash), Microsoft has few manufacturing costs, so it cannot spend huge sums on new plant and equipment. Microsoft's management would like to purchase other major software companies, but the federal government won't let it, for fear that it will reduce competition. (For example, the Justice Department blocked Microsoft's proposed purchase of softwer maker Inuit.) Instead, Microsoft is constrained to purchasing small software makers with promising new products. Ironically, even this does not use much of its cash because, first of all, the companies are small, and second, the owners of these small companies prefer to be paid with Microsoft stock rather than cash. Microsoft's huge holdings of liquid assets could eventually hurt its stock performance. Liquid assets typically provide about a 5% return, wheras Microsoft investors are accustomed to 30% returns. If Microsoft's performance starts to decline because it can't find enough good investment projects, it should distribute cash to its common stockholders in the form of dividends. One big problem: Bill Gates owns roughly 20% of Microsoft, and the last thing he wants to do is pay personal income tax on billions of dollars of dividend income. In the early years Microsoft did not pay dividends because it wanted to conserve cash. Today it is drowning in cash but still doesn't pay a dividend on its common stock. Source: David Bank, "Microsoft's Problem Is What Many Firms Just Wish They Had," The Wall Street Journal, January 17, 1997, p. A9 So what does this have to do with the Xbox? Well, you remember all the things that have been said about the Xbox, right? About how Microsoft was taking a huge loss on every console sold. That Microsoft was paying companies to develop games, and those companies were turning right around and making ports to other systems, tripling their profit while Microsoft footed the bill. That Microsoft is spening millions and millions of dollars on top notch advertising and buying up the biggest names they can find. Heck, they just bought Rare from Nintendo for a massive amount of cash. Are we seeing the connection yet? The above artical was written in '97, before the release of the Xbox. In it, Microsoft is said to be almost drowning in cash, with no good way to get rid of all of it's money. Are we putting 2 and 2 together yet? I propose that Bill Gates is showing some of that incredible business genious again. Bill knows the videogame is a multi-billion dollar a year industry. It also knows that the only company to ever beat Nintendo was Sony, and the Playstation. All others, including SEGA, went the console route, and lost their shirts on it. For Bill, this was a Win-Win situation. If the Xbox became a big seller, he would have his foot into one of the biggest consumer electronic markets in the world. If it failed, Bill would have a legitimate, LEGAL way to dump off some of Microsoft's excess cash. Ever wonder why the Xbox is so darn big? Or why it has a huge hard drive or built in modem? They weren't for the player's convenience, they weren't to be a selling point of the system. They were all to increase the cost of manufacturing the consoles. The rumors that Microsoft was paying for all the development for games? More cash being funneled away from the main body of Microsoft. Huge multi-million dollar ad campaigns? Buying up companies like RARE for sums that made even the industry giant Nintendo stand up and take notice? Bill is syphoning off billions of dollars from Microsoft's main body into this system. The Xbox is really a glorified black hole for Bill Gates to dump excess cash into. If the system becomes the next big thing and drives Sony and Nintendo out of the market, well he just gets that much richer, and STILL gets to dump massive amounts of cash into Xbox manufacturing plants. He still gets do dump cash into game development. Not only does Bill now have a firm hold on a multi-billion dollar industry, but he still has his money sinkhole for excess cash. THAT, ladies and gentlemen, is what the Xbox is. Not a game system, but an ingenious way for Bill Gates to unload unwanted cash from his other, more important companies. -Edymnion |