What Xbox means for Microsoft’s revenue

Stephane de Sakutin | AFP | Getty Images People playing XBOX ONE at a trade show.

Stephane de Sakutin | AFP | Getty Images
People playing XBOX ONE at a trade show.

When Microsoft reports earnings after the close Monday, how its Xbox business performs could have an impact on whether the tech titan beats or misses Wall Street’s expectations.

Satya Nadella, Microsoft’s CEO, is passionate about gaming, calling it “the single biggest digital life category,” and he’s dedicating a lot of time and money to it.

For example, last September, Microsoft spent $2.5 billion to buy Mojang, maker of the popular game “Minecraft.”

Today, investors are awaiting more clarity about Xbox’s success in winning over gamers, which Microsoft bulls bet could help the software giant best analyst forecasts.

“This could be a real source of the upside,” says Daniel Ives of FBR Capital Markets.

The company is aiming make its Xbox One console more attractive to consumers by slashing the price. It initially sold the Xbox One for $499, but then cut the price by $100 for an Xbox sold without the Kinect motion sensing device. Microsoft then cut another $50 off last fall for the holidays.

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The price cuts appear to have had a big impact. Microsoft said that, for both November and December, the Xbox One was the best-selling console in the U.S., though it declined to give exact numbers.

Looking ahead, one critical question for investors is how exactly Xbox fits into Microsoft’s broader business strategy.

At first, Microsoft thought of the Xbox console as a potential way to control the living room. The device, so it was believed, could be the central hub that consumers looked to for all their entertainment, whether that was gaming, movies or music.

But Microsoft now appears to be setting more humble goals for the product. For instance, last October, Nadella officially shut down Xbox Entertainment Studios, ending the company’s move into original video programming.

Technology analysts say that Xbox’s role appears under review.

“Xbox doesn’t necessarily fit into Nadella’s cloud and mobility strategy,” says Patrick Moorhead, president of Moor Insights & Strategy. “Right now, I think there is a reassessment going on about where Xbox strategically fits.”

Moorhead adds, “They can’t just pull the plug on it tomorrow. They have a huge installed base of people, and most Xbox users have Windows PCs, as well.”

However, while it’s under review, Xbox still offers Microsoft a lot of potential benefits.

For one, it’s a product that attracts many young fans. Lewis Ward, IDC’s Research Director of Gaming, told CNBC that he estimates Microsoft sold 12.5 million of its Xbox One consoles through the end of 2014.

Also, thanks to Xbox Live, Microsoft retains useful data about its users, which it could use to cross-sell other services and products, such as Skype or Office 365.

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Still, Xbox also faces financial challenges. Analysts at Nomura estimate that, after accounting for sales, marketing, and research and development, Microsoft loses money on its Xbox division.

So this afternoon, it’s up to Nadella to prove to his investors that gaming isn’t just an important source of entertainment, but a business that makes both strategic and financial sense for Microsoft’s future.

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