Microsoft needs Natal—or whatever it's called by the time it goes on sale—to be a hit. The technology is inarguably cool, and is a rare bright spot in Microsoft's decade-old—and thus far mostly disappointing—push to move beyond PCs and into game consoles, music players, and smartphones. Operating income at its Entertainment & Devices unit, which is responsible for those products, is expected to come in at $773 million for the year that ends June 30, according to UBS Securities (UBS). That's a 10 percent operating margin, compared with 72 percent for Windows, its most profitable business. While the Xbox is a strong No. 2 in the video game market (after the Nintendo Wii), the entertainment division has lost $8.6 billion on sales of $49 billion since 1999, estimates Katherine Egbert of Jeffries & Co. An initiative to build Internet-based TV systems has yet to take off, and its iPod-like Zune music players have bombed. While Apple (AAPL) just sold its two millionth iPad, Microsoft recently scrapped a tablet code-named Courier. In smartphones, Microsoft's share in the first quarter was 6.8 percent, down from 10.2 percent the year before.
Even as the company hypes Natal and its new mobile software, Windows Phone7, investors don't expect smash hits; in fact, they'd settle for small losses on these and other gadgets. "It's hard to make the case this has been a good use of shareholder capital," says Todd S. Lowenstein, who runs HighMark Capital's value fund. "I don't fault them for trying this stuff, but investors are getting impatient." Other investors suggest that, like IBM (IBM) a decade ago, Microsoft should refocus its efforts on its massively profitable PC and corporate software businesses. Its cash from operations last quarter alone was $7.4billion, a company record. Yet its shares are down about 50percent since Steve Ballmer took over as CEO on Jan.13, 2000. "The stock would go up if Microsoft exited its consumer businesses," says Bill Whyman of ISI Group.
