Xbox Sales Slow Down As Next-Gen Xbox Series X Approaches

Some bad, some good.

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Microsoft has released its latest earnings report, detailing how the business is performing across all sectors. Overall, business is good for Microsoft, but the Xbox division is (mostly) struggling.

Gaming revenue at Microsoft for quarter ended December 31--the holiday quarter--dropped by 21 percent, which works out to a downturn of $905 million. Revenue from Xbox One console sales dropped by a significant 43 percent due to fewer systems sold and lower prices.

Revenue from game sales and services fell by 11 percent, or $295 million. Microsoft said it was a particularly tough quarter to compare against because Holiday 2018 was so strong due to a "third-party title." It wasn't specified, but analyst Daniel Ahmad said it was Fortnite.

Microsoft gets a cut of all games sold on Xbox, so when a title does exceptionally well as both those games did, Microsoft benefits as well. Similarly, when their sales moderate, Microsoft sees a drop-off in its third-party royalty payment.

There was some good news for Microsoft during the quarter, as subscription revenue grew. This is no surprise, given Microsoft is ramping up Xbox Game Pass.

Looking at the six-month period ended December 31, gaming revenue overall was down 16 percent, or $1.1 billion. The downturn was driven hardware sales that were down 40 percent, and content and services revenue dropping 6 percent, or $302 million, overall.

Microsoft no longer officially reports monthly active Xbox Live users, but CEO Satya Nadella said on an earnings call that Microsoft set a new record for the most monthly active Xbox Live users during the latest period. He also said xCloud is off to a good start with "hundreds of thousands" of people signing up for the beta. He also said Xbox Game Pass subscriptions doubled during the quarter.

Across all business categories, Microsoft posted revenue of $36.9 billion for the quarter, which is up 14 percent. Net income was also strong, as Microsoft made $11.6 billion in profit during the three-month period.

It is expected that Microsoft's gaming revenue is slowing down, as the Xbox One is at the end of its lifecycle. Microsoft's next system, the Xbox Series X, releases this holiday with Halo Infinite as a launch title. That should help improve Microsoft's fortunes, while the company will also continue to expand Xbox Game Pass and xCloud as revenue-drivers.

The real money in gaming for Microsoft is in software and services, not console sales. "The business is around software and service growth. That is the profitable part of the business; selling the hardware is not the profitable part of the business," Phil Spencer has said.

Looking ahead, Microsoft CFO Amy Hood said she expects gaming revenue to continue to decline in the "low double-digit range" in the lead-up to the Xbox Series X release this holiday. She said revenue will also struggle for a bit due to "lower transaction volume on a third-party title," which is likely a reference to Fortnite.

Hood also explained that the results announced today regarding the downturn in sales for Xbox were in line with what the company was expecting.

Microsoft is the first of the major gaming companies to announce earnings for the quarter. Nintendo and Electronic Arts will announce their latest results on January 30, while Sony, Take-Two, Ubisoft, and Activision Blizzard will report next week.

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