Microsoft Gaming Revenue Falls in Q2

• Microsoft reported a 9% year‑on‑year decline in gaming revenue for the second quarter, citing weaker first‑party performance and a steep drop in console sales.
• The company also saw a 5% decrease in content and services revenue and a 32% fall in hardware revenue.
• Executives acknowledged the challenges but highlighted growth in PC engagement and cloud‑based play.

Revenue declines across key gaming segments

Microsoft’s gaming division generated $623 million during the three months ending December 31, 2025, marking a 9% decline from the previous year. The company attributed the downturn to weaker first‑party content performance compared to 2024, which had delivered stronger results. Content and services revenue, which includes game sales and subscriptions, fell by 5% year‑on‑year. Hardware revenue dropped even more sharply, declining 32% due to lower console sales.

The company’s 10‑Q filing with the SEC pointed to the unusually strong first‑party lineup of 2024 as a major factor behind the year‑on‑year comparison. Chief financial officer Amy Hood told investors that results were “below expectations” and primarily driven by first‑party performance. Microsoft did not specify which titles underperformed during the quarter. However, Activision’s shift in release strategy for Call of Duty and a reported decline in the franchise’s player base may have contributed to the weaker results.

Hardware performance also weighed heavily on the division’s overall numbers. Console sales have been under pressure amid increased competition and shifting consumer habits. Microsoft’s hardware revenue decline reflects broader market trends affecting dedicated gaming devices. These challenges have prompted the company to emphasize cross‑platform engagement and cloud‑based services.

Leadership commentary and future expectations

CEO Satya Nadella sought to reassure investors by highlighting areas of growth within the gaming ecosystem. He noted that PC player numbers reached record levels during the quarter. Paid streaming hours on Xbox also increased, suggesting rising interest in cloud‑based gaming. These metrics indicate that engagement remains strong even as revenue fluctuates.

Looking ahead to the third quarter, Microsoft expects further year‑on‑year declines in both content and services revenue and hardware sales. The company acknowledged that the near‑term outlook remains challenging. Forecasts reflect continued pressure on first‑party performance and ongoing softness in console demand. Despite this, Microsoft emphasized its commitment to delivering games across Xbox, PC, cloud and other devices.

During the quarter, Microsoft partnered with Asus to release the ROG Xbox Ally handheld device. Asus reported that the product exceeded expectations, offering a rare bright spot in the company’s hardware portfolio. The success of the handheld suggests growing interest in portable gaming solutions. This trend may influence Microsoft’s future hardware strategy.

Next‑generation hardware and cross‑platform ambitions

Microsoft confirmed that development of its next‑generation gaming hardware is underway. Details remain limited, but the announcement signals continued investment in the console market despite current sales challenges. The company appears to be balancing long‑term hardware planning with short‑term shifts in consumer behavior. This approach reflects the broader industry transition toward hybrid gaming ecosystems.

Craig Duncan, head of Xbox Game Studios, recently stated that Microsoft aims to be “more consistent” in releasing titles on PlayStation 5. His comments highlight the company’s evolving cross‑platform strategy. Expanding availability beyond Xbox hardware could help broaden audiences for first‑party games. Such moves may also mitigate the impact of fluctuating console sales.

The company’s multi‑device strategy aligns with its broader focus on cloud services and subscription models. These offerings allow Microsoft to reach players regardless of platform. As the industry becomes increasingly interconnected, cross‑platform releases may play a larger role in shaping revenue stability. The shift could also influence how future hardware is positioned within the ecosystem.

Industry analysts note that the decline in console sales is part of a wider trend affecting multiple hardware manufacturers. Global demand for dedicated gaming devices has softened as players increasingly adopt PC and cloud‑based alternatives. At the same time, handheld gaming has seen renewed momentum, driven by devices such as the Steam Deck and other portable PCs. This environment may help explain why Microsoft is exploring both next‑generation consoles and partnerships in the handheld space.