Can Xbox Outlast the AI Bubble?

The nice inexperienced “X” that introduced us pleasure over 27 years of gaming historical past is as soon as once more affected by poor {hardware} gross sales and declining income from its cloud-based subscriptions. This is just one other observe in Xbox’s miserable monetary diary, although this can be one of the vital important intervals of loss but.

Microsoft’s private computing enterprise, which accounts for Windows OS, its Surface PCs, and Xbox, was down 3% in comparison with the identical time final yr. Microsoft mentioned Xbox was what introduced down the full. At the identical time, the Windows OEM (authentic gear producer) enterprise—particularly, these companies that accomplice with Microsoft to promote Windows PCs—noticed income keep successfully flat at simply 1% good points (largely due to declines in Surface income) in comparison with the identical vacation interval final yr. PC shipments had been up yr over yr in response to current information, however Microsoft’s {hardware} manufacturers took such a licking final yr that it offset any good points.

Xbox {hardware} revenues haven’t had a persistently constructive quantity since 2023. In this previous quarter ending Dec. 31, 2025, Xbox {hardware} declined 32%. Last yr, Xbox blamed tariffs whereas it hiked the value of all its gaming {hardware}. An Xbox Series X console now prices $600 should you get a digital version with 1TB of storage. It’s no surprise the console didn’t promote nicely over the vacations.

See Xbox Series X and S at Amazon

Microsoft made all its cash from cloud companies

These dour monetary forecasts for Xbox don’t imply Microsoft is having a foul time. On the opposite, it’s making financial institution off its companies—particularly something that’s based mostly round AI. In its second quarterly earnings report for its 2026 fiscal yr, Microsoft’s complete income was up 17% whereas its web revenue had shot up by one other 23%. Its complete of $81.3 billion in income isn’t indicative of a wholesome state of its consumer-end {hardware}.

In a thread on X, CEO Satya Nadella proclaimed his firm’s cloud income had lastly hit $51.5 billion, up 26% from final yr. And you may guess the place the true cash was. Microsoft’s clever cloud companies made up the lion’s share of the revenue, with its Azure and different cloud service merchandise income up 39%.

Xbox content material and companies income was additionally down one other 5%. That shouldn’t be a shock, as final October Microsoft elevated the value of its Game Pass Ultimate from $20 to $30 a month. In his earnings name on Wednesday, Nadella revered the “record PC players and paid streaming hours on Xbox.” That’s per what Xbox boss Phil Spencer lately touted in a submit on LinkedIn, with Game Pass cloud hours up 45% year-over-year.

You may blame choose video video games for Xbox’s decline. Call of Duty: Black Ops 7 didn’t promote practically in addition to Black Ops 6. Late final yr, GamesIndustry.biz quoted information from Alinea Analytics, which mentioned the most recent Call of Duty offered simply 401,000 copies on Steam near a month after launch in comparison with the practically 2.3 million of final yr’s rendition. Xbox had many different video games launched final yr. Some of them had been fairly good, akin to The Outer Worlds 2 and Ninja Gaiden 4. There had been much more remakes of Xbox 360-era classics like Gears of War: Reloaded. Even promoting cross-platform, they didn’t make sufficient cash to beat Xbox’s waning {hardware} gross sales or drive extra gamers to get a costlier Game Pass subscription.

Microsoft has to outlive the AI bubble for Xbox to dwell

This month, Xbox touted a number of new video games from its portfolio we must always get excited for. Two video games—the open-world racing recreation Forza Horizon 6 and the return of the motion fantasy RPG Fable—appear promising. Both of those video games will even be accessible on PlayStation 5. The Halo remake, Halo: Campaign Evolved, and Gears of War: E-Day must also be out on Xbox companies and PlayStation 5 in 2026. Plus, we’ll have indie video games like Double Fine’s pottery brawler Kiln and sure a number of surprises earlier than Grand Theft Auto VI steals the thunder.

There’s sufficient right here for avid gamers to sink their enamel into, however is any of it sufficient to implement extra Game Pass subscriptions? They definitely received’t be shopping for a brand new Xbox console for the sake of those titles, particularly when the Series X with no disc drive and 1TB of storage prices $600.

Microsoft has by no means made most of its cash on {hardware}. It’s lengthy been a software program firm in the beginning. Nadella was completely happy to announce Windows 11 had reached 1 billion customers, a close to 45% soar yr over yr. An enormous a part of that metric is due to the corporate sunsetting Windows 10 and forcing customers to make the swap.

Xbox is dragging down Microsoft’s numbers, and that ought to pose a crimson flag for anyone who stays a fan of the model. Nadella’s current statements have proven he desires Microsoft to develop into the world’s true AI behemoth, and the corporate is spending boatloads to the tune of $37.5 billion to realize it. Either Microsoft will proceed to make record-high revenues on its software program stack (whereas ignoring bills), or the corporate will take an enormous hit as soon as the world realizes the AI buildout received’t occur anytime quickly. In any case, Xbox is the outlier that’s dampening Microsoft’s constructive outlook. We can solely count on extra firings, extra studio closures, and a tougher promote for any future Xbox {hardware}.

See Xbox Series X and S at Amazon