Microsoft has reported a dramatic 42 percent year-over-year decline in Xbox console revenue for the quarter ending in June. This steep drop is the most significant since the Xbox Series X/S launched in 2020 and extends a troubling trend for the company’s gaming hardware division.
Declining Xbox Hardware Sales
The 42 percent decrease in quarterly hardware revenue follows an 11 percent decline in the same period last year. This pattern of falling sales has been persistent, with Xbox hardware revenue showing year-over-year declines in six of the last seven quarters. According to Microsoft CFO Amy Hood, the trend is sure to continue, with further decline projections for the upcoming fiscal quarter ending in September.
Microsoft has stopped sharing raw shipment figures for its consoles, unlike its competitors. However, industry analyst Daniel Ahmad estimates that Microsoft sold fewer than 900,000 Xbox consoles in the quarter ending in March. In comparison, Sony’s PlayStation 5 shipped 4.5 million units in the same period.
The significant drop in Xbox hardware sales suggests that the console’s peak may have occurred in 2022, during its second full year on the market. Typically, successful consoles see peak sales in their fourth or fifth year, followed by a gradual decline as they approach the end of their lifecycle and before the introduction of a successor.
Comparison with Other Consoles
The Nintendo Switch, which launched in 2017, is now experiencing a typical sales decline. For the first calendar quarter of the year, Switch unit sales fell by 36 percent year-over-year, with 1.96 million units shipped. This drop, while noticeable, is less severe if we are to compare it to the decline sales of Xbox Series X/S, which is a newer console.
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In contrast, Sony’s PlayStation 5 has seen its annual sales rise consistently. For the fiscal year ending in March, PS5 sales peaked at 20.8 million units. However, Sony also reported a 28.5 percent year-over-year decline in PS5 sales for the January-through-March quarter. It remains to be seen how the PS5 fared in the April-through-June quarter, as Sony has not yet released those figures.
Subscription and Content Services
Despite the drop in hardware sales, Microsoft’s gaming content and services revenue saw a robust 61 percent increase year-over-year. Notably, 58 percent of this growth was attributed to the net impact of the Activision acquisition, which cost Microsoft $68.7 billion.
With physical console sales in decline, Microsoft is increasingly focusing on its Game Pass subscription service to drive growth. The company views Game Pass and other subscription models as crucial to building a sustainable software and services business.
“I do think the real goal here is to be able to take a broad set of content to more users in more places and really build what looks like more to us the software annuity and subscription business,” Hood stated during the investor call. “I think we’re really encouraged by some of the progress and how we’re making progress with Game Pass.”
This strategic shift suggests that while Xbox hardware sales may continue to struggle, Microsoft is investing heavily in its subscription services and broader gaming ecosystem. If current trends persist, the Xbox brand might evolve to rely more on digital services and content distribution, rather than physical console sales.
Conclusion
Microsoft’s latest earnings report highlights a challenging period for Xbox hardware sales, marked by a significant revenue decline. With declining console sales and a focus on subscription services like Game Pass, Microsoft is adapting its strategy to maintain its presence in the gaming market. The future of Xbox may increasingly revolve around digital services and gaming subscriptions, potentially diminishing the role of physical console sales in the brand’s overall strategy.
