Xbox sees revenue decline for first time since acquiring Activision Blizzard

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Microsoft recently disclosed its financial results for the fourth quarter and the full fiscal year 2026, ending June 30, confirming a difficult period for the Xbox division. This marks the division’s first annual revenue decline since the acquisition of Activision Blizzard, despite recent price increases on hardware, accessories, and subscriptions. In the fourth quarter, revenue from Xbox content and services—which includes Xbox Game Pass, first-party games, third-party titles, and online services—decreased by 10% compared to the same period last year. For the fiscal year, Xbox revenue declined by 5%, disrupting the growth observed since Activision Blizzard was incorporated into Microsoft’s balance sheet. This performance occurred amidst significant strategic shifts, including expanded game releases on competing platforms, revised Game Pass offerings, and broad internal restructuring.

Hardware revenue saw a substantial decrease of 13%, reflecting a continued deceleration in sales for both the Xbox Series X and Series S consoles. Over the last twelve months, hardware revenue fell by 29% as fewer gaming systems were sold. The Xbox Series X is now priced at $750, a 33% increase from its 2020 launch price. Microsoft indicated that Call of Duty: Black Ops 6 experienced a challenging fiscal year in 2026, partly due to the strong performance of Microsoft’s own major games in the preceding year.

New Xbox CEO Asha Sharma is refocusing the division’s strategy on major franchises like The Elder Scrolls and Fallout. The financial pressures have led to significant workforce reductions. Microsoft confirmed plans in July to cut 3,200 jobs across its video game division, with layoffs impacting studios such as id Software, Obsidian, and ZeniMax Online Studios. Earlier in the month, Microsoft sold off internal studios Double Fine and Compulsion Games entirely. Labor unions in the United States and Canada are reportedly engaged in legal disputes with Microsoft over claims of mishandled layoffs. Looking ahead, approximately 1,600 additional layoffs are planned for Microsoft’s gaming division within the next twelve months. Due to financial pressure, Microsoft reportedly explored the possibility of spinning off the entire Xbox division. Adjusted for constant currency, Xbox revenue dropped by 11% for the fiscal year. The segment’s gross margin dollars decreased by 2%. However, gross margins improved year-over-year due to lower amortization costs from the Activision Blizzard acquisition. Operating expenses increased by 8% (or 7% in constant currency), partly due to impairment charges on Xbox. Consequently, operating income fell by 14%, and operating margins decreased to 21%.

Microsoft anticipates mid-single-digit declines for Xbox content and services revenue in the upcoming period, with hardware revenue also expected to dip year-over-year. The CEO stated that decisions are being made across Xbox’s platform and operations to reset it for long-term growth. Recent reports indicate that consoles continue to sell at a loss per unit, even after an upcoming price hike. For the fiscal year ending June 30, 2026, Xbox revenue dropped by approximately $1.7 billion overall, stemming from decreases in both content and services sales and reduced console unit sales. Despite the negative financial figures, Microsoft’s Chief Financial Officer Amy Hood confirmed these results. Satya Nadella, head of Microsoft’s cloud division, expressed confidence in the business’s recovery, affirming that the company expects the Xbox division to grow again throughout fiscal year 2027. He highlighted that recent changes are aimed at strengthening the long-term sustainability of the business and views the current period as a transitional phase.

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The division has implemented cost-containment measures, including layoffs, studio reorganizations, updates to Game Pass catalogs, and new monetization models. Concurrently, Microsoft continues to invest in Xbox’s next generation, codenamed Project Helix, which will integrate PC and console ecosystems, enabling access to stores like Steam from an Xbox for the first time. The Xbox division’s performance contrasts with Microsoft’s overall excellent financial results. In the same quarter, the company reported significant growth driven primarily by its cloud computing and artificial intelligence sectors, with Azure exceeding $100 billion in annual revenue for the first time.

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