Microsoft has reported a dismal financial quarter and year for Xbox, with revenue declining 7% in fiscal year 2026, amounting to a $1.7 billion loss. Despite this, executives including Xbox boss Asha Sharma and CEO Satya Nadella maintain a positive outlook, expecting a return to growth by the end of fiscal year 2027.
Quarterly and Annual Revenue Declines
For the quarter ending June 2026, Xbox revenue fell 10% compared to the same period last year. Microsoft attributed this to 'strong first party performance,' though only two first-party titles launched in that quarter: Double Fine's party game Kiln, which flopped, and Forza Horizon 6, which is still slated for a PlayStation 5 release later in 2026. Over the full fiscal year, Xbox revenue decreased by 7%, equivalent to $1.7 billion (approximately £1.27 billion).
Hardware Sales Continue to Slide
Xbox hardware revenue declined 13% quarter-over-quarter and 29% for the full year, driven by lower console sales volumes. Despite a brief uptick in UK sales following Forza Horizon 6, the overall trend remains negative. The upcoming price hike for Xbox Series X/S is unlikely to reverse this decline.
Executives Predict Recovery by FY27
Microsoft is banking on a return to console exclusives, starting with Gears of War: E-Day later this year, to boost hardware sales. However, messaging around exclusivity has been confusing, and the Gears of War franchise is past its prime. Asha Sharma stated on X: 'In FY26, over 200 million new players came to Xbox and our games, but our business did not grow with our audience. We need to close that gap by investing in what players value. That will take time, but we expect to return to growth by the end of FY27.'
During an investor call, Satya Nadella said: 'When it comes to Xbox, we are making the necessary decisions required across our content portfolio, platform, and operations to reset the business for long term growth. We have the best IP in the industry, and talented studios around the world, and believe we can bring these strengths together and expect to return the business to growth in fiscal 2027.'
Challenges Ahead: Studio Cuts and Layoffs
Microsoft recently closed several studios and laid off thousands. Notably, id Software, the developer behind Doom, has been reportedly gutted, despite Microsoft's stated interest in more Doom games. Of the 3,200 planned layoffs, only half were immediately affected; the remainder are expected to lose their jobs by July 2027 but are still required to work on new Xbox games in the interim.
Analysts are skeptical about the turnaround plan. The upcoming Fable reboot in February and Grand Theft Auto VI, which will sell predominantly on PlayStation 5, are unlikely to significantly boost Xbox hardware sales. New initiatives like Fallout games will take years to develop and may not help if they remain exclusive to a shrinking user base.
