gaming

Microsoft’s revenue from Xbox console sales was down a whopping 42 percent on a year-over-year basis for the quarter ending in June, the company announced in its latest earnings report.

The massive drop continues a long, pronounced slide for sales of Microsoft’s gaming hardware—the Xbox line has now shown year-over-year declines in hardware sales revenue in six of the last seven calendar quarters (and seven of the last nine). And Microsoft CFO Amy Hood told investors in a follow-up call (as reported by GamesIndustry.biz) to expect hardware sales to decline yet again in the coming fiscal quarter, which ends in September.

The 42 percent drop for quarterly hardware revenue—by far the largest such drop since the introduction of the Xbox Series X/S in 2020—follows an 11 percent year-over-year decline in the second calendar quarter of 2023.

Peaking too early?

Microsoft no longer shares raw console shipment numbers like its competitors, so we don’t know how many Xbox consoles are selling on an absolute basis. But industry analyst Daniel Ahmad estimates that Microsoft sold less than 900,000 Xbox units for the quarter ending in March, compared to 4.5 million PS5 units shipped in the same period.

Overall, the reported revenue numbers suggest that sales of the Xbox Series X/S line peaked sometime in 2022, during the console’s second full year on store shelves. That’s extremely rare for a market where sales for successful console hardware usually see a peak in the fourth or fifth year on the market before a slow decline in the run-up to a successor.

The older Nintendo Switch, which launched in 2017, is now firmly in that sales decline period of its life cycle. Yet worldwide unit sales for the console declined only 36 percent year-over-year—to 1.96 million units shipped—for the first calendar quarter of the year. That’s a less precipitous relative drop than Microsoft is now facing with the much younger Xbox Series X/S.

Annual sales of Sony’s PlayStation 5 have continued to rise in recent years, peaking at 20.8 million units for the fiscal year ending in March. But PS5 sales did decline over 28.5 percent year-over-year for the January-through-March quarter, just the third such quarterly decline the console has posted on a year-over-year basis (Sony has yet to post sales numbers for the April-through-June quarter).

A subscription bright spot?

Aside from hardware sales, Microsoft’s gaming content and services revenue was up a healthy-sounding 61 percent year-over-year for the latest reported quarter. But a full 58 percent of that increase was the “net impact from the Activision acquisition,” which you may remember cost the company $68.7 billion dollars.

Given the cratering Xbox hardware revenues, it’s not all that surprising that Microsoft is focusing on its (now more expensive) Game Pass subscription side to buoy the Xbox business as a whole.

“I do think the real goal here is to be able to take a broad set of content to more users in more places and really build what looks like more to us the software annuity and subscription business,” Hood said during the investor call. “I think we’re really encouraged by some of the progress and how we’re making progress with Game Pass.”

That kind of talk suggests the Xbox brand will continue to thrive via Xbox Game Pass, and possibly through Xbox Game Studios games for other platforms. But if these sales trends continue, we may be facing a near future where physical console hardware is no longer a core part of the Xbox brand.

The FTC says the across-the-board price increases that Microsoft recently announced for its Xbox Game Pass subscription service tiers represent “exactly the sort of consumer harm from the merger the FTC has alleged” when it sought to block Microsoft’s merger with Activision. In a letter to the court posted as part of an ongoing appeal by the FTC in the case, the federal regulator alleges Microsoft’s moves are a clear example of “product degradation” brought about by “a firm exercising market power post-merger.”

The letter’s primary focus is on the soon-to-be-discontinued $10.99/month Console Game Pass tier. That’s being replaced with a $14.99/month Game Pass Standard tier (a 36 percent price increase) that no longer includes “day one” access to all of Microsoft’s first-party titles. To maintain that key benefit, “Console” subscribers will have to spend 81 percent more for the $19.99 Game Pass Ultimate tier, which also includes a number of additional benefits over the current $10.99/month option.

Is this “based on the acquisition”?

The FTC notes that these changes “coincide with adding Call of Duty to Game Pass’s most expensive tier.” Previously, Microsoft publicly promised that this Game Pass access to Activision’s ultra-popular shooter would come “with no price increase for the service based on the acquisition.”

It’s that “based on the acquisition” clause that’s likely to give Microsoft some wiggle room in arguing for its planned pricing changes. Inflation is also a sufficient explanation for a large portion of the price increase in nominal terms—the $14.99 Microsoft charged for a month of Game Pass Ultimate when it launched in 2019 is the equivalent of $18.39 today, according to the BLS CPI calculator. When Microsoft raised the Game Pass Ultimate monthly price from $14.99 to $16.99 just last year—just before the Activision merger was finalized—the company said in a statement it had “adjusted the prices to reflect the competitive conditions in each market.”

Microsoft might have a harder time finessing the alleged “degradation” inherent in going from the discontinued Game Pass Console tier to the new, more expensive Game Pass Standard tier. True, the replacement does include the online multiplayer benefits of Game Pass Core, which could previously be purchased separately. But the removal of the long-promised day one access to first party games will heavily reduce the value most subscribers get from the new option.

It’s now been over a year since the FTC first announced it intended to appeal the ruling that effectively stopped its attempted injunction against the merger deal. While Microsoft and Activision have moved forward with their merger since then, courts have reversed similar mergers on appeal even after a merger deal has fully closed.

Elsewhere in its letter, the FTC makes note of previous arguments that Microsoft’s recent round of nearly 2,000 Xbox-focused layoffs is a sign of “reduced investments in output and product quality” post-merger.