The big green “X” that has brought us joy in its 27-year history of gaming is once again suffering from poor hardware sales and declining revenue from cloud-based subscriptions. It just is another note in Xbox’s depressing financial diary, despite this being one of its most significant periods of loss.

Microsoft’s personal computer business, which accounts for Windows OS, Surface PCs, and Xbox, decreased 3% compared to the same time last year. Microsoft says the Xbox is leading the way overall. At the same time, the Windows OEM (original equipment manufacturer) business—that is, those businesses that partner with Microsoft to sell Windows PCs—saw revenue effectively remain flat with just 1% gains (mostly due to a drop in Surface revenue) compared to the same holiday period last year. PC shipments are increasing every year according to new databut Microsoft’s hardware brands took such a licking last year that it offset any gains.

Xbox hardware revenue has there is no constant positive number since 2023. Last year, Xbox blamed the tariffs while it raised the prices of all its gaming hardware. An Xbox Series X console now costs $600 when you get a digital edition with 1TB of storage. It’s no wonder the console didn’t sell well during the holidays.

Microsoft makes all its money from cloud services

These poor financial forecasts for Xbox do not mean that Microsoft is having a bad time. On the contrary, it has removed its services — especially anything based on AI. In its second quarterly earnings report for the 2026 fiscal year, Microsoft’s total revenue rose 17% while its net income rose another 23%. Its total of $81.3 billion in revenue is not indicative of a healthy state of its consumer-end hardware.

In a thread of XCEO Satya Nadella announced that his company’s cloud revenue finally reached $51.5 billion, up 26% from last year. And you can guess where the real money is. Microsoft’s intelligent cloud services account for the lion’s share of revenue, with Azure and other cloud service products accounting for 39%.

Xbox content and services revenue also fell another 5%. That’s not a shock, as it was last October at Microsoft raised the price of its Game Pass Ultimate from $20 to $30 per month. In his earnings call on Wednesday, Nadella touted “record PC gamers and paid Xbox streaming hours.” That’s in line with what Xbox boss Phil Spencer recently stated in a post on LinkedInwith Game Pass cloud hours increased 45% year-over-year.

You can blame select video games for the Xbox’s decline. Call of Duty: Black Ops 7 didn’t sell nearly as well Black Ops 6. End of last year, GamesIndustry.biz cited data from Alinea Analytics, which says the latest Call of Duty sold only 401,000 copies on Steam nearly a month after launch compared to nearly 2.3 million renditions last year. Xbox has many other games released in the last year. Some of them are really good, like The Outer Worlds 2 and Ninja Gaiden 4. There are many more remakes of Xbox 360-era classics as well Gears of War: Reloaded. Even with cross-platform sales, they didn’t make enough money to overcome declining Xbox hardware sales or push more players to get a more expensive Game Pass subscription.

Microsoft has to survive the AI ​​bubble in order for Xbox to survive

This month, Xbox announced several new games from its portfolio that we should be excited about. Two games—the open-world racing game Forza Horizon 6 and the return of the action fantasy RPG fable—looks promising. Both of these games are also available on the PlayStation 5. The Hello remake, Halo: The Campaign is in Progressand Gears of War: E-Day should also be out of Xbox and PlayStation 5 services in 2026. In addition, we have indie games such as pottery brawler by Double Fine The kiln and probably a few surprises before Grand Theft Auto VI stole the thunder.

There’s enough here for players to sink their teeth into, but is any of it enough to warrant massive Game Pass subscriptions? They certainly won’t buy a new Xbox console for these titles, especially when the Series X without a disc drive and 1TB of storage costs $600.

Microsoft has never made most of its money in hardware. It has long been a software company first and foremost. Nadella was happy to announce Windows 11 reached 1 billion users, a nearly 45% jump year-on-year. A large part of the metric is thanks to the company that has introduced Windows 10 and forced users to make the switch.

Xbox is dragging down Microsoft’s numbers, and that should raise a red flag for anyone who remains a fan of the brand. Nadella’s recent statements show that he wants Microsoft to become the true AI behemoth of the world, and the company spending on boats to the tune of $37.5 billion to achieve this. Either Microsoft continues to make record high profits on its software stack (while ignoring costs), or the company will take a huge hit once the world realizes the AI ​​buildout won’t happen anytime soon. In any case, Xbox is the outlier that dampens Microsoft’s positive outlook. We can only expect more firings, more studio closings, and a harder sell for any upcoming Xbox hardware.