Microsoft’s latest financial results paint a stark picture of Xbox’s current state – consoles are dying, but services are holding steady. The company released its Q1 FY26 earnings on October 28, 2025, revealing that Xbox hardware revenue dropped a staggering 29% year-over-year while content and services actually grew 1%, beating analyst expectations of a 4-6% decline. This narrative of declining console sales offset by resilient digital services has become the defining story of the current Xbox generation.
Hardware Collapse Continues
Xbox hardware revenue cratered 29% compared to Q1 FY25, mirroring the identical 29% drop from the year before. This isn’t a one-quarter anomaly but a consistent trend that shows no signs of reversing. The Verge reported that this continues a devastating pattern across the generation, with previous quarters showing 22% declines in Q4 FY25, 29% drops in Q1 FY25, and a catastrophic 42% plunge in Q4 FY24. The trajectory is unmistakably downward.
Microsoft attributes the hardware collapse to lower console sales volume as tariffs and inflation drive manufacturing costs upward. The company has responded by raising prices, pushing the Xbox Series X to $599.99 in the United States following price increases on May 1 and October 3, 2025. These increases likely exacerbate rather than solve the fundamental problem – at that price point, PlayStation 5 represents stronger value for console-focused gamers who already see both companies as mature platforms nearing end-of-life.
The timing couldn’t be worse for console sales. We’re approaching the end of current generation hardware cycles, with rumors swirling about next-generation consoles launching in 2026-2027. Smart consumers wait for new hardware rather than paying premium prices for aging technology that will be obsolete within two years. This natural lifecycle decline combines with the price increases to create a perfect storm for Xbox hardware sales.
Hardware Revenue Trend (Year-over-Year)
- Q4 FY24: -42% decline
- Q1 FY25: -29% decline
- Q2 FY25: Data not specified
- Q3 FY25: Data not specified
- Q4 FY25: -22% decline
- Q1 FY26: -29% decline (most recent)
Content and Services Beat Expectations
The bright spot in Xbox’s quarterly results is content and services revenue growing 1% year-over-year to $5.508 billion. This might sound underwhelming, but it beats Microsoft CFO Amy Hood’s guidance which predicted mid-single-digit declines of 4-6%. The company credited two primary drivers for exceeding expectations – robust Game Pass subscription growth and strong third-party content sales.
Game Pass continues proving its value proposition despite the oversaturated subscription gaming market. Players embrace the service for its game library, day-one first-party releases, and cloud gaming capabilities that let them play on any device. While the service doesn’t move the needle dramatically on revenue growth, it prevents the steeper declines that would occur if players shifted to purchasing games individually or gravitating toward competitor services.
Third-party content represents unexpected strength, with publishers apparently capitalizing on Xbox’s multiplatform strategy where first-party titles now launch on PlayStation and Nintendo Switch alongside Xbox platforms. This creates opportunity for third-party publishers to maintain presence on Xbox while Microsoft’s own games reach broader audiences. Pure Xbox reported on this divergence, noting that first-party content declined during the quarter despite major releases like Grounded 2 and Gears of War: Reloaded.
| Metric | Q1 FY26 | Y/Y Change | Microsoft Forecast |
|---|---|---|---|
| Overall Xbox Revenue | $5.51 billion | -2% | -4% to -9% |
| Hardware Revenue | Not specified | -29% | Not provided |
| Content & Services | Not specified | +1% | -4% to -6% |
| First-Party Content | Declined | Negative | Not specified |
| Third-Party Content | Grew | Positive | Not specified |
First-Party Content Weakness
The decline in first-party content revenue during Q1 FY26 shouldn’t surprise anyone tracking Xbox’s release schedule. The first half of 2025 saw mega releases – Bethesda’s The Elder Scrolls IV: Oblivion Remastered, id Software’s DOOM: The Dark Ages, and Obsidian Entertainment’s Avowed all launched and performed well commercially. Oblivion Remastered became the fifth best-selling game of the year in the US according to analytics firm Circana, demonstrating that excellent first-party content still sells when available.
The problem is Q1 FY26 (July-September 2025) fell between those mega releases and upcoming major titles. Grounded 2 entered early access and Gears of War: Reloaded provided a remake, but neither carries the blockbuster appeal of Elder Scrolls or DOOM releases. This scheduling gap meant Q1 FY26 inevitably underperformed compared to quarters featuring major franchise launches.
Looking forward, Microsoft’s major first-party titles scheduled for late 2025 and 2026 include Fable, Clockwork Revolution, and Forza Horizon 6. These releases should theoretically reverse the first-party content decline that’s pulled down overall revenue growth. However, the multiplatform strategy complicates matters – many of these titles will launch on PlayStation and Nintendo Switch simultaneously, fragmenting console-exclusive appeal that historically drove Xbox hardware adoption.
The Broader Microsoft Picture
While Xbox struggles, Microsoft’s overall financial performance remains stellar. The company reported total Q1 FY26 revenue of $77.7 billion, up 18% year-over-year, with net income of $27.7 billion. Operating income in the Personal Computing segment (which includes Xbox) grew 18% despite gaming’s relative weakness. The real money is in Azure cloud services, which saw revenues surge 40% year-over-year to $30.9 billion.
This fundamental reality shapes Xbox strategy going forward. Gaming matters to Microsoft as a brand and ecosystem play, but it’s no longer the growth engine for the corporation. Azure expansion, AI capabilities, and enterprise cloud services dominate management attention and capital allocation. Xbox operates within this broader context where it contributes to the ecosystem and generates reasonable returns, but doesn’t require dramatic growth or investment priority.
Windows Central noted this shift explicitly, pointing out that Microsoft CFO Amy Hood’s primary metric for company performance is margins rather than revenue growth. From that perspective, the Personal Computing segment’s 18% operating income growth represents success regardless of gaming’s flat-to-declining revenue picture. Higher-margin businesses like cloud and AI matter more to shareholders than gaming volume metrics.
The “Xbox Everywhere” Strategy Vindicated
Microsoft’s declining console sales have accelerated the company’s shift toward “Xbox everywhere” positioning that treats gaming as a service accessible across devices rather than console-dependent. This quarter’s results validate that strategy. While hardware cratered, content and services held steady through multiplatform releases, Game Pass subscriptions, and mobile/cloud gaming access.
CEO Satya Nadella praised the Xbox division during earnings calls for recent critically-acclaimed releases and partnerships like ASUS ROG Xbox Ally devices that bring Xbox experiences to new hardware platforms. This reflects the company’s view that Xbox’s future lies beyond proprietary consoles toward software and services delivered wherever players want them.
The multiplatform game releases – Forza Horizon 5 on PlayStation, upcoming titles planned for Switch and PS5 – generate revenue from non-Xbox audiences while reducing hardware dependency. Purists complaint that these ports undermine exclusivity, but from Microsoft’s financial perspective, maximizing software revenue across platforms matters more than protecting exclusive console advantages.
What Happens Next
Xbox hardware sales will likely continue declining through the remainder of this console generation. Price increases and aging hardware don’t reverse that trajectory – they accelerate it. The next-generation console reveal, whenever that comes, will be the story that matters for hardware sales recovery. Until then, expect continued 20-30% year-over-year hardware declines as players defer purchases waiting for next-gen announcements.
Content and services should stabilize around current levels or potentially improve modestly as major first-party releases (Fable, Clockwork Revolution, Forza Horizon 6) launch in late 2025 and 2026. Game Pass subscriptions should continue growing, though growth rates will moderate as market penetration reaches saturation among core gamers. The real upside comes from mobile and cloud gaming expansion reaching casual audiences who never buy dedicated gaming consoles.
Microsoft’s focus on next-generation Xbox hardware design and capabilities will be critical for reversing this downward trend. If next-gen Xbox fails to differentiate meaningfully from PlayStation or lacks compelling exclusive software, the hardware decline could accelerate further with Microsoft potentially pivoting entirely away from first-party console manufacturing toward full-time software and services provisioning.
FAQs
What are Xbox’s Q1 FY26 earnings?
Xbox content and services revenue grew 1% year-over-year while hardware revenue plummeted 29% in Q1 FY26 (quarter ended September 30, 2025). Overall gaming revenue fell 2% year-over-year to $5.51 billion.
Why did Xbox hardware sales drop so much?
Xbox hardware revenue declined 29% due to lower console sales volume as tariffs and inflation increased manufacturing costs, prompting Microsoft to raise prices on Series X|S consoles multiple times in 2025.
What drove content and services growth?
Xbox Game Pass subscription growth and strong third-party content sales offset a decline in first-party content revenue during Q1 FY26. The beat expectations of 4-6% declines.
Why did first-party content decline?
Q1 FY26 (July-September) fell between major release windows. While 2025’s first half saw DOOM, Oblivion Remastered, and Avowed launches, Q1 FY26 only had Grounded 2 early access and Gears of War: Reloaded remaster.
Is Microsoft abandoning hardware?
No, but the company has shifted strategy toward “Xbox everywhere” where gaming is service-based across devices rather than console-dependent. Hardware remains part of the strategy but no longer the primary focus.
When is the next Xbox console coming?
Microsoft hasn’t announced next-generation Xbox hardware release dates. Speculation suggests 2026-2027 launches are likely, but nothing is confirmed yet.
How is Microsoft’s overall business performing?
Exceptionally well, with total revenue up 18% to $77.7 billion and Azure cloud services growing 40%. Gaming is a small part of Microsoft’s overall business despite its brand significance.
Conclusion
Microsoft’s Q1 FY26 earnings reveal the uncomfortable truth about current Xbox generation hardware – it’s in irreversible decline with 29% year-over-year revenue drops mirroring the previous year’s identical percentage decline. This consistent deterioration reflects natural console lifecycle decline combined with price increases that make aging hardware uncompetitive against alternatives. The one bright spot – content and services revenue growing 1% while beating 4-6% decline expectations – demonstrates that Microsoft’s pivot toward software and services accessibility across platforms is working. Game Pass subscriptions and strong third-party content sales offset first-party content weakness that naturally occurred between major release windows. The financial results vindicate Microsoft’s “Xbox everywhere” strategy prioritizing software revenue over console exclusivity, though the long-term implications for hardware competitiveness remain concerning. With next-generation consoles likely arriving in 2026-2027, Xbox hardware sales will probably continue deteriorating until new systems launch. The question isn’t whether current hardware sales will improve – they won’t – but whether next-generation Xbox hardware can differentiate enough to reverse this decade’s trend of Xbox trailing PlayStation in console sales. Microsoft’s broader financial health remains robust thanks to Azure and cloud services growth that dwarfs gaming revenue, but the division’s stagnation raises uncomfortable questions about whether dedicated gaming hardware matters to the world’s largest tech company.