Xbox Revenue Falls 9% in FY26 Q2 Despite Microsoft’s Overall Growth

Microsoft’s latest earnings report for the second quarter of fiscal year 2026 painted a strong overall picture, but Xbox stood out as the weak link.

While the company announced a 17% year-over-year jump in revenue to $81.3 billion, driven largely by cloud and AI growth, its gaming division struggled.

According to Microsoft, gaming revenue dropped 9% compared to the same quarter last year.

Xbox content and services revenue also fell 5%, with the company attributing the decline to last year’s stronger first-party content lineup.

Hardware performance was even more concerning, with Xbox hardware revenue plunging 32%. Microsoft did not disclose console sales numbers, but the trend is clear: Xbox console sales are sliding as the brand shifts toward a service-driven ecosystem rather than relying on hardware.

The slowdown is notable because Xbox content and services had posted strong gains throughout much of FY25, including multiple quarters of double-digit growth. That momentum has now faded, with FY26 Q2 marking a shift into negative territory.

Other consumer-facing businesses like Windows OEM and Devices, which grew 1%, and search and news advertising, which rose 10%, highlight just how much Xbox is lagging behind.

In a conference call, Microsoft CFO Amy Hood addressed the issue directly, noting that the decline was “below expectations, driven by first-party content with impact across the platform.” She also mentioned that Game Pass revenue is expected to grow in Q3, suggesting that subscription services are not the cause of the current drop. However, she acknowledged that Xbox hardware revenue is likely to decline again in the next quarter, with hopes that Game Pass growth will offset the losses.

The quarter covered October to December 2025, during which four major titles were released: Ninja Gaiden 4, Keeper, Outer Worlds 2, and Call of Duty: Black Ops 7. While Call of Duty is usually a guaranteed blockbuster, Black Ops 7 saw significant sales decreases this time. It trailed behind Monster Hunter Wilds, Borderlands 4, NBA 2K26, and Battlefield 6 in the US market (as per Circana reports), leaving Xbox without a major hit to drive momentum.

The broader concern is that Xbox has moved away from exclusives, removing a key reason for players to invest in its consoles. Combined with tariffs and rising hardware costs, the Xbox Series S now sells for $399, the same price as the PlayStation 5 Digital Edition, which offers stronger performance. On top of that, Microsoft raised the price of Game Pass by 50%, frustrating many loyal fans.

Looking ahead, speculation continues about a new Xbox console [codenamed Magnus] rumored to feature a Windows-like environment with Steam integration. While that could appeal to PC-focused gamers, pricing will be critical.