Xbox’s Q2 FY26 earnings have revealed a significant challenge for Microsoft, one that cannot be attributed to hardware, subscriptions, or broader economic trends. A decline in revenue has been directly linked by the company to its first-party game releases. This is a notable admission that the content designed to define the platform did not generate sufficient momentum during the quarter. This situation brings Xbox’s long-term strategy into sharp focus, particularly as the gaming industry increasingly relies on exclusive titles to drive user engagement.
The downturn in Xbox revenue was hinted at when Satya Nadella’s opening statement on gaming content highlighted “record PC players in paid streaming.” This emphasis on PC and cloud gaming suggests a struggle to find positive console-related news.
- Gaming revenue decreased by 9%.
- Xbox hardware revenue saw a significant drop of 32%.
- Xbox content and services revenue declined by 5%.
Some might attribute these declines to recent changes in Game Pass. However, during the earnings webcast, Microsoft CFO Amy Hood stated that the company anticipates Game Pass revenue to grow in Q3, not decrease. This suggests Game Pass is not the primary driver of the current revenue drops.
Conversely, Hood also indicated that Xbox hardware sales are expected to decline again in Q3. This projected hardware dip is hoped to be counteracted by potential growth from Game Pass. Regardless, the Xbox brand appears to be struggling overall, with further decreases anticipated for the console.
Amy Hood explicitly attributed the decline in gaming revenue to first-party games, stating, “Gaming revenue was below expectations, driven by first-party content with impact across the platform.” The Q2 period, spanning from October 1 to December 31, 2025, saw the release of four titles: Ninja Gaiden 4, Keeper, Outer Worlds 2, and Call of Duty: Black Ops 7.
It was not anticipated that games like Ninja Gaiden and Keeper would generate the majority of revenue for the quarter. Historically, Call of Duty is the title expected to be a major success for Microsoft and Xbox. However, recent reports indicate that Black Ops 7 experienced significant sales decreases, which largely explains the substantial drop in overall revenue.
Despite its late-year release, Call of Duty typically secures the top position in gaming sales. This year, Black Ops 7 fell behind four other major titles: Monster Hunter Wilds, Borderlands 4, NBA 2K26, and Battlefield 6.
What will it take to stop the slide?
The current trajectory for Xbox appears to be a significant departure from previous years. The perceived abandonment of console exclusives, for instance, has removed a key incentive for many players to purchase an Xbox console.
Furthermore, due to ongoing tariffs and the rising cost of older hardware, the console’s price has reached a record high, exceeding its initial MSRP. Compared to competitors, Microsoft’s entry point is now the most expensive: the Series S is priced at $399, matching the PlayStation 5 Digital Edition, which offers significantly greater performance.
Adding to these challenges, Xbox chose to increase the price of what was considered a leading gaming deal by a substantial 50% amidst the current technological landscape. The question remains how Xbox, or Microsoft, intends to reverse this trend.
Given the current circumstances, a clear path out of this predicament is not apparent. Many long-time Xbox fans have been alienated, seemingly without receiving equivalent benefits in return. While increasing game accessibility is positive, it does not provide a compelling reason to invest in a console that appears to be actively diminishing its own appeal.
Perhaps an increasing reliance on Xbox Play Anywhere could pave the way for the rumored next Xbox console, potentially featuring a Windows-like environment and Steam integration. However, if such a device is priced similarly to a rumored Steam machine or a gaming PC, especially with current RAM costs, gamers may opt for those established devices instead of a new Microsoft offering.
For players who have largely transitioned to Windows PC, an Xbox with Steam integration could be appealing. However, it remains uncertain if such a device would genuinely reverse the current decline. Beyond this rumored new Xbox device and games already releasing across all platforms, there appears to be little else on the horizon to anticipate.
The brand’s journey from the success of the Xbox 360, through the struggles of the Xbox One, to the resurgence with Game Pass, and now its current state, reflects a series of decisions that have led to these outcomes.
This quarter’s results emphasize the critical importance of consistent, high-impact first-party releases for Xbox’s future. While Game Pass, cloud gaming, and PC growth offer some support, they cannot fully compensate when the flagship game lineup falters. With numerous significant projects still in development and rising expectations, Microsoft’s studios are now under pressure to demonstrate that the platform’s content strategy can recover, ensuring this downturn is merely a temporary setback rather than a lasting trend.
