Microsoft’s Xbox gaming business is continuing to struggle, with revenue falling 2% in the first quarter of its 2027 financial year and a 14% decline in hardware revenue and weaker Game Pass performance.

Microsoft reported Xbox revenue of US$5.38 billion for the three months ended September 30, 2026, down from US$5.51 billion in the corresponding period last year.

Content and services revenue also declined 2%, with Microsoft blaming weaker third-party game sales and falling Xbox Game Pass revenue. Growth in first-party games only partially offset the declines.

The figures underline the difficulty Microsoft faces in maintaining momentum across its Xbox ecosystem, with the company increasingly relying on software, subscriptions and services to generate revenue beyond traditional console sales.

Xbox hardware has been a particular area of weakness, with the 14% revenue decline suggesting continued pressure on console sales.

Despite the broader downturn, some of Microsoft’s gaming properties continue to perform strongly.

Minecraft recorded all-time highs in engagement and revenue, while first-party content delivered growth during the quarter.

Microsoft also highlighted strong performances from major gaming franchises and double-digit revenue growth across PC gaming.

Microsoft is expecting a stronger second quarter, forecasting Xbox content and services revenue growth in the mid-to-high single digits. The anticipated improvement is largely due to the timing of new game releases across its first-party and third-party publishing portfolios.

The company expects growth to be strongest during the holiday quarter, before moderating in the third and fourth quarters. Hardware revenue, however, is expected to decline again year-on-year.