Xbox Series X and S sales struggle as Microsoft reports gaming revenue down 4%

Microsoft's gaming revenue fell four percent and Xbox hardware revenue declined 30 percent in the latest financial quarter, the company has reported.

While Microsoft does not report console sales and did not provide an updated number for Game Pass subscribers (it had 25m as of January 2022), it's clear the company is struggling to sell Xbox consoles. In fact Xbox console sales have struggled for some time. Xbox Series X and S sales were down during the crucial holiday quarter last year, and it looks like they were down in the quarter ending 31st March this year, too.

The only bright spot for Microsoft was a slight three percent increase in Xbox content and services revenue. The company said this was "driven by better-than-expected monetisation in third-party and first-party content, and growth in Xbox Game Pass".

So, why is Xbox struggling? In its financial report, Microsoft blamed most of the Xbox hardware revenue decline on "increased console supply" during the same period last year, which suggests it's still having a hard time with Xbox Series X and S supply two-and-a-half years after launch.

But the drop in Xbox console sales can also be attributed to Microsoft's first-party video game woes. Xbox Game Studios had an extremely quiet 2022 after a string of delays, and with the failure of Halo Infinite, there is increased pressure on Bethesda's Starfield, due out later this year, to fuel interest in Xbox consoles and Game Pass.

Microsoft boss Satya Nadella put a positive spin on the quarter in additional remarks, revealing the company set third quarter records for monthly active users and monthly active devices in Xbox.

"Great content remains the flywheel behind our growth," Nadella said. "We have now surpassed 500 million lifetime unique users across our first party titles.

"And I've never been more excited about our pipeline of games, including the fourth quarter launches of Minecraft Legends and Redfall."

And while Microsoft nearly hit $1bn in revenue from subscriptions during the quarter, Xbox chief Phil Spencer admitted last year Game Pass growth had stalled on console, with PC Game Pass a focus.

Looking ahead, Microsoft expects gaming revenue growth in its next financial quarter in the mid to high single digits, with Xbox content and services revenue growth in the low to mid-teens due to Game Pass and first-party and third-party content.

The financials come ahead of Microsoft's proposed $68.7bn purchase of Activision Blizzard, which is subject to regulatory approval. The UK's Competition and Markets Authority (CMA), which makes its decision today, is one of three key regulators around the world still scrutinising Microsoft's deal, alongside the US Federal Trade Commission and the EU's European Commission.

The deal is crucial for Xbox's fortunes, and is a key element in Microsoft's plan to launch its own app store for games across mobile devices. In March 2024 new rules are expected under the EU's Digital Markets Act, which will require Apple and Google to open their mobile platforms to app stores owned and operated by other companies.

Microsoft aims to capitalise on this with its own Xbox platform, and the buyout of Activision Blizzard would fill an "obvious hole in our capability", Phil Spencer said last month, with the likes of Call of Duty Mobile, Diablo Immortal and Candy Crush Saga being "critically important" to attracting players to its new platform.

Of course, gaming is but a small part of Microsoft's overall business. For those interested in eye-watering numbers, Microsoft's revenue was $52.9bn , an increase of seven percent, for the quarter. Profit was $18.3bn, an increase of nine percent.