Microsoft Corporation (NASDAQ:MSFT) unveiled its next generation Xbox One on Tuesday, and it sports features that should appeal to both gamers and non-gamers. The voice controls appear to be quick and sleek, making it easy for users to switch among a variety of activities, including everything from watching television to using Skype and playing games.


xbox one

Upsides For Microsoft

Morgan Stanley analysts Benjamin Swinburne and Keith Weiss issued a report focusing on the new Xbox One and what it means for Microsoft. They say that previously, the Xbox has been an “underappreciated asset” for the company. They believe that the new console will help to strengthen the company’s position within the next generation living room.

In addition, they believe that the Xbox One will drive upside in the company’s entertainment and devices revenue, pushing for mid to high single digit growth in the next few years. However, they said even this could be conservative.

The analysts’ upside estimates are for 14 million Xbox consoles (including Xbox One and the older Xbox 360) to be sold in fiscal year 2014, which is a 44 percent increase year over year. They see a potential 8 to 9 percent upside to their revenue estimates for Microsoft Corporation (NASDAQ:MSFT)’s fiscal 2014 and 2015 years.

Xbox One’s EPS Impact

The analysts said there could be a near-term negative impact on earnings per share from the Xbox One, especially if it has negative gross margins during the first year of production. They see a potential loss of 5 cents per share in the company’s 2014 fiscal year and a loss of 2 cents per share in the 2015 fiscal year.

However, they said these negative impacts on earnings per share will be partially offset by the sales of software to use with the Xbox One. Assuming about three games for each Xbox console with a 40 percent operating margin, they add 1 cent per share to the company’s earnings per share, partially offsetting the dilution from the early years of Xbox One production.

Microsoft’s Xbox One As A Distribution Platform

The analysts said it’s important for media companies to realize that the Xbox one is a new distribution platform rather than another content buyer or competitor. They believe that if the search and discovery features of the console are as powerful as they seem, then content producers could see a major boost in consumption.

They see downside risk if Microsoft Corporation (NASDAQ:MSFT) tries to become “a significant creator of new content,” although they see upside if the company “challenges cable / satellite / telco incumbents in Pay-TV distribution.”

Microsoft Pushes The Television Experience

It’s certainly clear that Microsoft Corporation (NASDAQ:MSFT) doesn’t mean for the Xbox one to be another competitor for cable or satellite TV providers. That said, it is trying to replace the current boxes provided by cable or satellite providers, and in the future, Microsoft could expand by offering some kind of subscription content distribution service.

By replacing their box, Microsoft seeks to enhance the television viewing experience. If the company is successful, then Swinburne and Weiss see downward pressure being applied to the company’s capital expenditures and a lift in free cash flow. They also see upside if Microsoft should decide to begin offering a subscription service.