Despite attracting over 200 million new players in fiscal year 2026, Microsoft’s Xbox division saw its gaming revenue fall by 7 percent. The decline was largely driven by weaker console hardware sales, a key part of Xbox’s business that includes first-party games and subscription services like Xbox Game Pass.
Microsoft’s fiscal year runs through June, so these numbers cover the 12 months ending in June 2026. While Microsoft’s overall Q4 results beat expectations due to strong Azure cloud earnings, Xbox’s gaming segment painted a different picture. In the final quarter alone, content and services revenue dipped 10 percent and hardware revenue tumbled 13 percent, according to GameDeveloper.
Cost Cuts and Price Hikes Aim to Reverse Decline
Xbox CEO Asha Sharma has responded quickly. In July, Microsoft cut 4,800 jobs, including 3,200 from the Xbox division, impacting four internal studios and trimming game development. Sharma outlined a plan to bridge the gap between a growing player base and falling profits, aiming for a turnaround by the end of fiscal 2027.
Part of the strategy is to raise console prices by up to $150 starting August 1 to offset higher hardware costs, like memory and storage. This follows an unusual move earlier in the year when Xbox reduced the price of its Game Pass Ultimate subscription, which had hurt subscriber growth. The hardware struggles mirror broader industry trends. Sony recently confirmed plans to end production of physical PlayStation discs by 2028, signaling a shift toward digital consoles that Xbox is now following. For years, Xbox has lagged behind PlayStation in hardware sales, limiting its ability to raise prices without risking demand.
