According to Gizmodo, Microsoft’s recent Q2 FY2026 earnings reveal a stark contrast: total company revenue hit $81.3 billion, up 17%, with net income soaring 23%, largely driven by a 39% jump in Azure and cloud services. However, the personal computing segment, which includes Xbox, fell 3%, with Xbox specifically blamed for the decline. Xbox hardware revenue has been consistently negative since 2023, and content/services revenue also dropped 5%. CEO Satya Nadella celebrated cloud revenue reaching $51.5 billion and Windows 11 hitting 1 billion users, but the report highlights a $600 Xbox Series X and a Game Pass Ultimate price hike to $30/month as factors in the gaming division’s struggles.
Xbox’s Hard Reality
Here’s the thing: Xbox isn’t just having a bad quarter. It’s showing a structural problem. The console is too expensive, and the pivot to Game Pass as the core business model is hitting a wall. You raise the price of your flagship subscription by 50%? Of course revenue from that service is going to drop. People cancel. And who’s buying a $600 disc-less console in this economy? The strategy feels confused. They’re pushing cloud gaming hard—Nadella and Xbox boss Phil Spencer both touted “record” streaming hours—but that doesn’t require their hardware. It actually undermines it. Why buy the box if the service works anywhere? They’ve built a fantastic funnel that bypasses their own storefront.
The AI Elephant in the Room
So where is Microsoft‘s head at? Look at the numbers and Nadella’s own statements. It’s all in on AI and cloud. The company is spending tens of billions, with a reported $37.5 billion earmarked, to become the “world’s true AI behemoth.” When you’re playing at that scale, a consumer hardware division with single-digit percentage declines is a rounding error. A distracting one. Microsoft has always been a software company at heart. Windows and Office print money. Azure prints even more. Xbox, as a physical product line, is an anomaly in their portfolio. And in a high-stakes race for AI dominance, anomalies get less patience and fewer resources.
The Cross-Platform Gamble
This is why every major upcoming Xbox game—Forza Horizon 6, Fable, the Halo remake—is also coming to PlayStation 5. They’ve basically admitted the console war for hardware sales is over. The new strategy is to be the best game publisher and subscription service, regardless of where you play. It’s a logical, software-centric move for Microsoft. But it’s a brutal pivot for the brand. What’s the incentive to stay in the Xbox ecosystem if the exclusives are gone? Game Pass value is the answer, but again, that price hike hurts. And as GamesIndustry.biz data showed, even blockbusters like the new Call of Duty are underperforming, which hurts that “content and services” revenue line even more.
What Comes Next?
I think the writing is on the wall. Xbox, as a hardware brand, is on life support. The next console generation feels less certain than ever. The focus will be on services, cloud streaming, and being a multi-platform publisher. For gamers, that might mean more games in more places. For the employees at Xbox game studios, it probably means more uncertainty, more studio closures, and more pressure to deliver massive, cross-platform hits. Microsoft’s future is Azure, Copilot, and AI models. Xbox’s future is as a content arm for that larger empire. It’s a pragmatic business decision, but it’s the end of an era for the green brand that defined console gaming for decades. Basically, don’t expect a “Series X 2.” Expect more Game Pass, on more devices, funded by Microsoft’s AI profits—until that bubble might pop, too.
