Xbox hardware revenue declined by 29 percent during Q1
Gaming revenue at Microsoft dipped by 2 percent year-on-year (or 3 percent in constant currency) during the first quarter of the current fiscal year.
That downturn was driven by a decline in Xbox hardware, which saw a revenue decrease of 29 percent due to a lower volume of consoles sold. Microsoft previously reported a hardware revenue decrease of 42 percent year-over-year during Q4 for the full-year ended June 30, 2024.
As laid out in Microsoft's FY 26 Q1 earnings report, the decrease in gaming revenue is offset in part by growth in "Xbox content and services," which increased by 1 percent "against a strong prior year comparable." The company attributes the latter to "better-than-expected performance" from third-party content.
During an investor call, looking ahead at Q2, Microsoft chief financial officer Amy Hood said the company expects revenue to decline for Xbox content and services "in the low to mid-single digits." This is against a prior year comparable that "benefitted from first-party performance," partially offset by growth in subscriptions.
In addition, Hood said that hardware revenue should decline "year-over-year." This is despite the CFO saying that the company saw a "great response to the Xbox Ally launch" on October 16.
Lastly, Hood added that Minecraft reached 155 million monthly active users, calling it an "all time high," while also setting a new record for players on PC, albeit without specifying a number.
Amidst price hikes and reported demand for higher profits, Xbox continues to focus on AI and cloud servicesDuring the same investor call, Hood touted revenue for Azure and other cloud services being "ahead of expectations," with a revenue growth of 40 percent. In terms of AI and cloud services, revenue was $30.9 billion, which translates to a 28 percent year-on-year growth.
The highlight on services like Azure and the use of AI, which Microsoft said it wants to push on its new Xbox console, has been met with criticism. For one, developers aren't warming up to generative AI, including reports about Microsoft-owned developer King, best known for the Candy Crush series, saying the studio has low AI adoption internally after Microsoft mandated its use. (Earlier in the year, Compulsion Games, another Xbox Game Studio, said that usage of generative AI is "not mandated" by the parent company.)
At the same time, Microsoft continues to face pressure from the current state of global events. Microsoft has been one of the main active targets of the Palestinian-led Boycott, Divestment, and Sanctions (BDS) campaign due to its Azure cloud and AI services.
In 2024, Microsoft employees launched No Azure for Apartheid, pressuring the company to terminate all Azure contracts and partnerships with the Israeli military and government. Meanwhile, throughout 2025, developers have publicly expressed solidarity.
In April, the team behind Tenderfoot Tactics removed the game from the Xbox store in support of the pro-Palestine boycott. Then, in August, STJV union members at Arkane Studios in France joined by BDS movement and demanded action from Xbox in an open letter. "We think that Microsoft has no place being accomplice of a genocide, and as Microsoft employees, we don't want to be part of this sinister project for Gaza," read the letter.
In September, Microsoft "ceased and disabled" Azure services to the Israeli Ministry of Defense, after allegations published in a Guardian article that Azure technology was being used to surveil Palestinians. The month prior, a number of current and former Microsoft workers and community members held quarter at Microsoft's headquarters in Redmond Washington, as part of a No Azure for Apartheid protest.
The news comes amid Xbox's decision to lay off hundreds of workers and raise the price of hardware and its Game Pass subscription service in the last year. Last week, a report indicated that a mandate from Microsoft to hit a profit margin of 30 percent may be partly behind these decisions.
