The head of Microsoft's gaming division, Asha Sharma, has shared a compelling set of figures: SpaceX's recent IPO valuation of approximately $1.75 trillion is equivalent to about 60% of Microsoft's total market capitalization, yet SpaceX's projected full-year 2025 revenue is only about 6% of Microsoft's. This comparison is presented not to revisit debates about SpaceX's valuation, but to highlight that Microsoft, whose stock has declined 19% year-to-date, appears significantly undervalued. The pressure on Microsoft's share price stems from core market concerns: the competitive impact of AI on its core software business and the immense costs of building its own AI data centers. Compounding these issues is the current poor performance of its gaming segment.
This assessment is based on a stern internal memorandum issued Wednesday by the new gaming division head, Asha Sharma. The key takeaway is that while the gaming business contributes roughly 8% to Microsoft's total revenue for fiscal 2025, it is currently generating almost no profit. Excluding the major game publisher Activision Blizzard, which Microsoft acquired in late 2023, the gaming division's revenue has shown an overall downward trend over the past five years.
Objectively, the entire gaming industry is facing difficulties. Data compiled by Matthew Ball indicates that after a significant surge during the pandemic, global gaming consumer spending growth has slowed markedly over the last five years; spending on console gaming (the segment including Xbox consoles) has nearly stagnated. However, Ball's data also shows that PC gaming, which is crucial for Microsoft, continues to experience relatively faster growth.
In her memo, Sharma pointed out that console manufacturers like Microsoft are grappling with soaring hardware component costs. Former gaming head Phil Spencer acknowledged as early as 2022 that the Xbox console business has been operating at a long-term loss. With component procurement costs now several times higher than last year, the scale of losses from console sales has widened further. This raises serious questions: Why does Microsoft persist in the gaming hardware business? Was the $75 billion acquisition of Activision Blizzard ultimately a wise strategic move?
There is currently no indication that CEO Satya Nadella intends to exit the gaming market. In a Wednesday interview with *The New York Times*' *Hard Fork* podcast, he stated that gaming is a business line within Microsoft with a longer history than even Windows or Office. He emphasized that Microsoft must "create great games and develop high-performance hardware, but only if this business model can be sustainably profitable."
Sharma's memo signals that significant cost-cutting measures within the gaming division are likely in the coming months. While such actions may improve the segment's profit margins, they are unlikely to spur business growth. Even if Nadella sees strategic value in retaining the gaming business, a market perspective persists that Microsoft should consider spinning off or selling the division outright. The question remains whether Nadella is willing to let his career legacy be tarnished by a business unit that has long been a drag on the company's performance.
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