According to Wccftech, Microsoft’s Q2 FY26 financial results revealed a 17% overall revenue increase to $81.3 billion, driven by cloud and AI. However, the gaming division saw a 9% overall drop, bringing in $623 million. The biggest decline was in Xbox hardware, with revenue down 32% year-over-year. This follows a 29% drop in the previous quarter. Xbox content and services revenue, which includes Game Pass, also fell by 5%. During the investor call, CEO Satya Nadella highlighted record PC players and paid streaming hours, while CFO Amy Hood forecasted continued revenue declines in the mid-single digits for gaming.
The Price Hike Backfire
Here’s the thing: this isn’t some mysterious market shift. It’s a pretty direct consequence of Microsoft’s own decisions. They raised the price of the Xbox Series X/S consoles twice last year. You price your product higher, you sell fewer units. It’s basic economics. But the context is even worse. They did this while simultaneously telling the world, loud and clear, that you don’t need an Xbox console to play new Xbox games. So why would anyone pay a premium for the hardware? It seems like they’ve been actively undermining their own console business for a while now, and these numbers are the bill coming due.
The Game Pass Paradox
Now, the 5% drop in content and services is arguably more troubling. That’s the segment that’s supposed to be the future—the high-margin, recurring revenue from software and subscriptions like Game Pass. Remember last year’s big Game Pass price increase? The whole point was to drive more revenue from the existing user base, even if growth stalled. Well, revenue is down. So what does that tell you? It probably means the number of subscribers paying that higher price has shrunk. Microsoft won’t give us those figures, but the math isn’t complicated. You can’t raise prices, see total revenue fall, and claim the strategy is working. It looks like they may have hit a ceiling, or even pushed some loyal users away.
Narrative vs. Numbers
I think the most telling part is the gap between the corporate narrative and the hard financials. Satya Nadella talks about “record PC players” and commitment to “every other device.” That’s the multi-platform, device-agnostic future. But Amy Hood’s guidance tells the real story: expect more declines. They’re basically admitting that last year’s results were boosted by a few big game launches, and that’s not repeating. The hardware line is expected to keep falling. So we’re left with a division where the old model (selling consoles) is in freefall, and the new model (subscriptions everywhere) isn’t yet making up the difference. It’s a risky transition, and this quarter shows they’re firmly in the painful middle of it.
A Trust Problem
Could this be about more than just price? Probably. There’s a real sense that Microsoft has lost the trust of a segment of its core players. First, you buy their console as the best place to play their exclusives. Then, those exclusives go to PlayStation. Then, the console and the subscription service get more expensive. At a certain point, the value proposition just evaporates. For businesses that rely on loyal customers, whether in gaming or industrial computing, consistent value and clear communication are everything. When that frays, recovery is hard. Microsoft’s gaming leadership has some serious explaining to do, because right now, the numbers are telling a very bleak story.
