Microsoft has released its latest earnings report for Q1 FY2026, revealing that gaming revenue from its Xbox division has dropped by 2 percent, amounting to $113 million. A large part of this comes down to a decline in Xbox hardware revenue, which went down by 29 percent. However, this was offset to a considerable degree by consistent growth seen by Xbox content and services – games and subscriptions – which went up by 1 percent.
The 1 percent growth, however, wasn’t noted as being particularly impressive. Rather, Microsoft referred to it as being “relatively unchanged” when compared to the growth it had seen from the previous quarter. Despite this, the company has been seeing considerable growth in its other department, with overall revenue coming in at $77.7 billion – a growth of 18 percent. Most of these was buoyed by Microsoft’s Cloud division, which saw $49.1 billion in revenue.
“We delivered a strong start to the fiscal year, exceeding expectations across revenue, operating income, and earnings per share,” said Microsoft’s executive vice president and CFO Amy Hood in a statement. “Continued strength in the Microsoft Cloud reflects the growing customer demand for our differentiated platform.”
CEO and chairman of Microsoft, Satya Nadella, had spoken about his long-term vision for the company’s gaming business. In an interview with TBPN, he spoke about wanting to expand the number of places where people can play games, and went as far as to compare the idea with how Microsoft Office is available in multiple platforms.
“We are now the largest publisher after the Activision [deal] so therefore we want to be a fantastic publisher, similar to the approach of what we did with Office,” said Nadella. “We’re going to be everywhere, on every platform. We want to make sure, whether it’s consoles, whether it’s the PC, whether it’s mobile, whether it’s cloud gaming, or the TV, so we just want to make sure the games are being enjoyed by gamers everywhere.”
Nadella also spoke about how the gaming business has to compete not with other games, but rather with short-form video content presented through social media platforms like TikTok, Instagram and YouTube. He noted that, in order for innovation to happen in the industry, revenue is also important, since that is how these innovations can get funding.
“After all, gaming’s competition is not other gaming,” Nadella said. “Gaming’s competition is short-form video. And so if we as an industry don’t continue to innovate both how we produce, what we produce, how we think about distribution, the economic model—best way to innovate is to have good margins. Because that’s the way you can fund.”
In the meantime, recent reports have indicated that Microsoft’s leadership has been keeping a more strict eye on the Xbox division after the company’s relatively recent large acquisitions. As such, it has set a goal of a 30 percent increase in what it refers to as “accountability margins” on Xbox. This target was reportedly set back in Fall 2023 by Hood, and has since then likely be the reason behind project cancellations, lay-offs and studio closures.
