Microsoft has published its latest financial report for the company’s second quarter of its 2026 fiscal year, and while the overall company revenue increased by 17% to a whopping $81.3 billion, that increase was driven by its cloud and AI services. Its games division, however, saw a 9% overall drop compared to last year, bringing in $623 million in revenue.
The biggest drop on the Xbox side came from its hardware, which saw a 32% drop in revenue compared to last year. This marks the second straight quarter where hardware revenue specifically has dropped to such a degree, after its first quarter report listed a 29% drop in hardware revenue.
It’s altogether a sizable, but unsurprising dip, considering the fact that the Xbox Series X/S consoles sold less than a non-big three, family and kid-dedicated console called the Nex Playground over Black Friday. It’s also not a surprise when you remember that Microsoft raised the price on the Series X/S consoles multiple times last year.
Once with a global price increase that hit the United States the hardest, and then again four months later with a price increase that only affected the United States. Pricing your customers out of wanting to buy your console is one way to sell less hardware, and that’s before we even get to the other major factor here: you don’t need an Xbox to play Xbox games.
Speaking of those games, despite first-party Xbox titles like Forza Horizon 5 selling like hotcakes when it arrived on PlayStation, revenue from Xbox content and services, which includes its Xbox Game Pass subscription, was also down compared to last year, with a 5% drop in revenue. A step back from its first quarter results, which did record a revenue increase, albeit by only 1%.
That said, the drop is a particularly damning stat when you consider that the major price spike that Game Pass saw last year was meant to ultimately drive more revenue from the service, even if it wasn’t growing in users. Now, while we can’t say for certain that Game Pass users have also taken a dive, since Microsoft hasn’t presented those figures, but to see services and software drop after last quarter does add fuel to the arguments that Microsoft has lost the trust of players, and that last year’s price spikes on hardware and services had a negative impact at the time, and could have a lasting impact that ultimately drives users further away from the platform.
In an attempt to be optimistic about the overall drop in revenue in its gaming division, Microsoft chief executive officer Satya Nadella told investors, “In gaming, we are committed to delivering great games across Xbox, PC, cloud, and every other device. And we saw record PC players, and paid streaming hours on Xbox.”
Later in the call with investors, chief financial officer Amy Hood said the company expects “revenue to decline in the mid-single digits” compared to the previous year, though she says that’s only due to last year benefiting “from strong content performance, partially offset by growth in Xbox Game Pass.” Meanwhile, hardware revenue is expected to continue falling.
Microsoft Reports a 9% Overall Drop in Xbox Revenue for Q2/FY26, Hardware Down 32%
