Microsoft recently announced its Q1 2026 earnings, revealing a significant decline in Xbox hardware sales. Revenue from Xbox hardware dropped by 29 percent year-over-year, following a 22 percent decline in the previous quarter and a 42 percent decrease in Q4 2024. This downward trend raises questions about the future direction of Xbox amid ongoing challenges.
In response to economic pressures like tariffs and inflation, Microsoft has recently increased the prices of its gaming hardware, with the Series X now starting at $599.99. The company has shifted focus from hardware to an “Xbox everywhere” strategy, with some success in content and services; however, that segment’s revenue grew by only 1 percent year-over-year this quarter.
Microsoft aims to improve its profit margins in these areas and is reportedly targeting a 30 percent margin. This ambition has led to layoffs and the cancellation of certain projects. The outlook for Q2 appears grim, with expectations for continued declines in Xbox hardware revenue and limited growth in content and services.
While Xbox sales struggle, Microsoft did report modest growth in its Windows OEM and Devices division, showing a 6 percent increase year-over-year. However, the performance of Surface devices remains unclear since Microsoft has ceased reporting their earnings separately, following a period of steady decline.
The company’s cloud services, particularly Azure, continue to drive growth, with a 28 percent revenue increase year-over-year, totaling $30.9 billion, and Azure growing by 40 percent. Overall, Microsoft reported total revenue of $77.7 billion for the quarter, an 18 percent increase from the previous year, with a net income of $27.7 billion, up 12 percent. The company attributes this growth primarily to its cloud offerings and robust productivity and business processes, which contributed $33 billion to its income.
Source: https://www.theverge.com/news/809532/xbox-sales-continue-to-tank