Breaking Up

Sony's PlayStation 3 is, arguably, the product of such a problem. While Sony's financial position was far from secure when the console was being developed, Sony Computer Entertainment was riding high on a wave of cash from the phenomenally successful PlayStation 2, and that created a culture which regarded money as no object - not only for Sony itself, but also, bizarrely, for its consumers. Driven forward on a wave of wealth and hubris, the PlayStation 3's development and launch were defined by a series of blunders from which a leaner, meaner, better managed and more profit-focused Sony is only now fully recovering.

In contrast, Nintendo is a standalone company, with no parent firm to whom to go running for cash. Despite decades of success and a significant pot of investments and assets, that independent status makes Nintendo into a thoroughly profit-focused firm, whose legendary creativity is both tempered by and driven by the need to make money in order to stay in business. It's a base instinct to those consumers who just want to talk in terms of creativity and artistry, but the reality is that Nintendo's status has forced it to learn how to do a lot more with a lot less.

Of course, that's a skill set which Nintendo built up over decades, especially during the lean years after the launch of the PlayStation when the firm's consoles were in the wilderness to large extent, overshadowed first by Sony and then even by the market's new entry, Microsoft. While Goldman Sachs' suggestion that the Xbox division would do well to embrace a similar approach is a solid one, the idea that this change in culture could happen overnight seems extremely optimistic.

The fact that there would have to be a major cultural change within the Entertainment and Devices Division before it could possibly survive as an independent country is only the first of what I believe are two major problem in the Goldman proposal. The second problem is not so much a flaw in Goldman Sachs' thinking, as a serious disconnect between their perspective and Microsoft's world-view.

From their report, it's clear that Goldman Sachs believes that Microsoft is, in essence, a corporate software firm. Its key business is in the enterprise sector, selling operating systems, office software, server software and a variety of supporting services to corporate clients. Selling operating systems to PC manufacturers is another facet of that business - the software ends up being used by consumers but it is still, essentially, a B2B sector.

Meanwhile, the firm has been trying very hard to make serious breakthroughs in the consumer space - the cuddly, customer-facing markets like music, games, mobile phones, search engines and so on. Goldman Sachs argues that this division of focus means that each side of the company ends up being a ball and chain for the other. It's a tempting course of logic, in some regards - one could see how the firm's corporate business holds back the cool, trendy image required by the entertainment business, while its dalliances with entertainment introduce a note of concern for the huge enterprises who place orders worth tens of millions of dollars at a time for business software.

Yet that's too facile a world-view, I believe. There's a much stronger argument - one to which Microsoft itself subscribes - which says that the two sides actually prop each other up, that being strong in consumer products and in corporate products are complementary goals rather than rival targets competing for attention.

After all, we live in a world where some of the predominant uses of technology are to distribute media, one where what platform consumers have in their pockets or under their television can crown winners and destroy losers not only in those immediate sectors, but also in development tools, in advertising, in network provision and in a host of other areas. The success of Xbox or Windows Phone, or the failure of Zune, isn't just about Microsoft's consumer division - it's got a knock-on effect on everything from the company's server business to its development tools division, and even plays into the question of whether Windows and Office can remain the dominant ecosystem for corporate clients.

As yet, that's a small effect - but Microsoft would be foolish not to have a foot in this market, all the same. Even ignoring the money to be made if the company can achieve its dream of the Xbox as the beating heart of a home's media system, the potential for knock-on positive or negative effects on the core businesses from which Goldman Sachs is so keen to separate the Xbox could potentially become significant in the coming years. Xbox may be small and expensive now, but in years to come it may well be a competitive advantage that Microsoft would dearly regret throwing away - and the same goes for Windows Phone.

Ultimately, then, I believe that Microsoft will ignore Goldman Sachs advice, and I suspect that few in the games business think otherwise. However, I'm not as convinced as some that the analysts were really being crazy about this idea. It doesn't fit with what Microsoft want to achieve as a corporation and it has serious drawbacks - but the basic observation that a little more focus on profitability could turn Xbox into a tighter, leaner and more competitive company and console is one that shouldn't be lost in our haste to deride another loony analyst report.