Some have suggested that Microsoft Corporation (NASDAQ:MSFT) should sell its Xbox division. Even CEO candidate and former Nokia CEO Stephen Elop has said he would probably sell the Xbox division if he takes over the reins. But not so fast, say analysts at Bernstein. They see inherent value in it as Microsoft increases the value of its consumer division and strategically moves further into cloud services.

Microsoft xbox one

Valuing Xbox Live for Microsoft

Analyst Mark L. Moerdler and his team note that Microsoft Corporation (NASDAQ:MSFT)’s Xbox One is aimed at providing a “one-stop living room entertainment hub.” They say many investors overlook Xbox Live, the company’s social entertainment network. It comes in free Xbox Live subscriptions and the premium offering with additional services, Xbox Gold.

They estimate that Xbox Live subscriptions generate $1.1 billion to $1.6 billion in revenue for Microsoft. They believe the company could bump those amounts up by 25% if it could get revenue from movie rentals, special programming fees, online gaming and online game sales.

The Bernstein team says that currently Xbox Gold isn’t a substitute for television or competitor to other streaming video providers. They call it “more of a content aggregator” and say it works well with traditional pay-TV services, which is in contrast to other services like Apple TV and Roku box which exist alongside the pay-TV services.

How Microsoft is using Xbox Live

At this point, Xbox Gold doesn’t have any original content as part of its subscription. Everything comes through apps, and the content is owned by the third party, which usually charges an additional fee. Bernstein analysts believe Microsoft Corporation (NASDAQ:MSFT) is leveraging Xbox Live Gold to push adoption of the new Xbox One console, Windows 8 and Windows Phone. They note that the company is using it to blend the user experience as part of the new One Microsoft strategy. They see Xbox Live as a “valuable asset within a portion of Microsoft’s consumer business whose value will increase as part of Microsoft’s strategic move to the cloud.”

They said Xbox is now investing “heavily” into its own original content so that the Xbox Live Gold will be more different from that of “side-car devices” and other streaming services. They see the service as being “an overall positive for the media industry.”

Bernstein’s view on Microsoft

They think Microsoft Corporation (NASDAQ:MSFT)’s “current share price embeds an unrealistically bad scenario of no to negative perpetual growth, billions of dollars of annual cash drain from Search and Mobile into perpetuity, and tens of billions of dollars of additional value destruction through ill-fated acquisitions and investments.” In their view, however, they believe Microsoft’s move of its enterprise business to the cloud will more than replace issues with Windows through significant revenue generation and upside to earnings per share.