Microsoft's latest earnings report showed Xbox in a rough spot even as the company overall posted a record fiscal year with revenue surpassing $331 billion and quarterly revenue of $90 billion. Xbox content and services revenue fell 10 percent year-over-year in the fourth quarter, while Xbox hardware revenue dropped 13 percent. Total Xbox revenue for the quarter came in at $4.983 billion, the lowest since Q1 2024's $3.919 billion, and a steep drop from the $5.34 to $5.95 billion range reported in the previous three quarters of fiscal 2026.
For the full fiscal year, Xbox revenue decreased $1.7 billion, or 7 percent, according to Microsoft's own reporting. The company attributed this to declines in both content/services (down 5 percent, against a strong prior-year comparison) and hardware (down 29 percent, driven by fewer console sales), partially offset by growth in Xbox Game Pass. Microsoft noted severance expenses and impairment charges tied to layoffs, though these were partly offset by lower-than-expected costs from its Voluntary Retirement Program.
The financial slide comes amid major upheaval at Xbox, including layoffs affecting 1,600 employees already, with another 1,600 expected over the next 12 months, and the separation from four or possibly five owned studios. New Xbox CEO Asha Sharma has signaled a shift toward focusing investment on major franchises like The Elder Scrolls and Fallout while cutting off smaller, more niche studios. The poor performance also followed a weak year for Call of Duty: Black Ops 6, part of the Activision Blizzard business Microsoft acquired for over $70 billion in 2023.
On the earnings call, CEO Satya Nadella addressed Xbox only briefly, saying Microsoft is making "the necessary decisions required across our content portfolio, platform, and operations to reset the business for long-term growth," and stated an expectation to "return the business to growth in fiscal 2027." He offered no specifics on what that would entail. This marked a notable shift in tone from a year earlier, when Nadella touted 500 million monthly active users, Microsoft's position as the top publisher on both Xbox and PlayStation, strong Call of Duty and Minecraft performance, and nearly $5 billion in annual Game Pass revenue.
Xbox's struggles come as Microsoft has raised console prices repeatedly, with the standard Xbox Series X now priced at $750, a 33 percent increase from its 2020 launch price. This is linked to Microsoft's broader tens-of-billions-dollar investment in AI infrastructure, including a $3.2 billion investment from Anthropic, and comes as the company reports Azure revenue surpassing $100 billion for the first time and Microsoft 365 Copilot reaching over 30 million paid seats. Microsoft is reportedly still losing money on each Xbox console sold even at the higher prices, and the company is working on next-generation hardware under the codename Project Helix.