Abstract:
Informed sources revealed that in recent months, a group of private equity institutions have been considering acquiring Microsoft's Xbox gaming business, with a valuation range of US$100 billion to US$150 billion for the sector. The discussions on the private equity side were only preliminary, lasted for a short time, and did not develop into formal negotiations with Microsoft. But this incident illustrates that if the turnaround plan for this troubled gaming business fails, Microsoft may find a successor. The list of private equity institutions participating in the evaluation cannot be confirmed yet.
A Microsoft spokesperson issued a statement saying: Xbox is not for sale and declined further comment.
Judging from the revenue scale of this business, the upper limit of the private equity valuation range is roughly equivalent to the recent leveraged buyout valuation level of gaming giant Electronic Arts.
The timing of private equity acquisition intentions coincided with a media report in June: Microsoft had considered spinning off Xbox or reorganizing it into a wholly-owned subsidiary - such arrangements would lower the threshold for subsequent sales; Microsoft had also considered establishing joint ventures with other partners. After that, Xbox management, led by Asha Sharma, turned its focus to improving operations and accelerating business growth.
The Xbox business includes Activision Blizzard: Microsoft will spend $75 billion to acquire this game publisher in 2023. The entire segment has approximately 14,000 employees. In recent years, the business has suffered from meager profits and declining sales; Microsoft's original plan to acquire a number of game studios failed to bring expected new revenue.
In the fiscal year ending in June, Xbox revenue fell 7% year-on-year to $21.8 billion. Microsoft disclosed earlier that its liability profit margin (approximately adjusted profit margin) has continued to decline over the past year, leaving only 3% in June.
Sharma has been pushing to turn around losses since taking over the business in February this year. According to media reports, she announced her plan in July: she plans to lay off 3,200 people in the next year, accounting for about 20% of the total number of employees, while increasing investment in flagship IPs such as "Halo" and "Minecraft".
Even so, Xbox accounts for a small proportion of Microsoft's overall portfolio, contributing only 7% of total revenue; and Microsoft continues to invest huge amounts of capital in data centers and other AI projects, squeezing free cash flow.
There are very few buyers who can raise more than US$100 billion to acquire Xbox alone. If a deal is to be completed, it will most likely require multiple private equity groups to operate.
If the Xbox acquisition comes to fruition, its scale will far exceed the largest leveraged buyout in history: earlier this year, Silver Lake Capital, the Saudi Public Investment Fund and Jared Kushner’s Affinity Partners jointly privatized Electronic Arts. The leveraged buyout valued the company at US$55 billion including debt. This valuation corresponds to Electronic Arts’ 12-month revenue of approximately US$7.5 billion, which is approximately 7 times the price-to-sales ratio. Unlike Xbox, Electronic Arts does not have a hardware console business that drags down profit margins.
The game industry grew rapidly during the COVID-19 epidemic, but now it is under obvious pressure: sales growth has stagnated; and the AI boom has pushed up the procurement cost of hardware required for console manufacturing. An internal calculation reported by the media on Tuesday reflects the upward cost pressure: Xbox internally predicts that the new console to be launched in 2028 may be priced at $1,200-1,800 for consumers.
The direct competitors of the Xbox console business are Sony PlayStation and Nintendo. Sony operates PlayStation's game and network services segment, with revenue of approximately US$29.8 billion in fiscal year 2025, basically flat year-on-year, but sales of consoles and self-developed games have declined.
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