Game Pass in the decline, not the recovery
Microsoft’s own explanation for why Xbox content and services shrank in the September quarter includes Game Pass. Its explanation for why the next quarter should be better doesn’t. CFO Amy Hood laid out both on Microsoft’s fiscal first-quarter earnings call on 28 October, US time.
Xbox revenue fell 2%, to $5,379 million from $5,508 million a year earlier, according to Microsoft’s release. Content and services fell 2% as well (1% in constant currency), which Hood said was “driven by declines in third-party content and XBOX Game Pass, partially offset by growth in first-party content.”
Neither the release nor Hood’s remarks put a size on Game Pass’s share of the drop, and The Verge notes Microsoft is still not giving an update on Game Pass subscriber numbers. PlayDayOne counts this as a fourth straight quarter of year-over-year decline for Xbox, and reports that Hood had guided to a “mid-single digits” drop for the division three months ago, so a 2% fall came in better than forecast.
Hardware is falling faster than services
The release and the call remarks give no percentage for console hardware. PlayDayOne and The Verge both report Xbox hardware revenue down 14%. Hood said “Hardware revenue in Q2 should decline year over year.” The Verge also quotes Xbox CEO Asha Sharma saying “console sales remain constrained by supply, with more demand than consoles available.”
| Line | September quarter | Second-quarter outlook |
|---|---|---|
| Xbox revenue | Down 2%: $5,379 million, from $5,508 million | No Xbox total given |
| Content and services | Down 2% (down 1% in constant currency) | Growth in the “mid to high-single digits” |
| Hardware | Down 14%, per PlayDayOne and The Verge | “Should decline year over year” |
The forecast bounce is a launch calendar
For the second quarter (October to December), Hood guided Xbox content and services growth to “mid to high-single digits,” “up sequentially driven by the timing of content launches across both third- and first-party.” She expects growth to be “strongest in the second quarter, with some deceleration in Q3 and further moderation in Q4.”
We read that as a forecast about the release calendar, not about the subscription. The outlook remarks name content launch timing as the driver and don’t mention Game Pass at all, and a growth rate that peaks in one quarter and then fades looks like a launch bump to us.
Modern Warfare 4 and GTA 6 carry the holiday pitch
Nadella’s pitch was games. He said Minecraft “delivered a record quarter, reaching all-time highs in both engagement and revenue,” and that World of Warcraft “had its largest beta in franchise history.” Microsoft enters the holiday season, he said, “with one of our strongest first and third-party line ups in years, including Modern Warfare 4 which launched last week to the best reviews for a Call of Duty game in more than a decade, and Grand Theft Auto VI which is coming to XBOX next month.”
The “best reviews” line is Nadella’s; how critics actually landed is in our Modern Warfare 4 review coverage.
Microsoft put no date on GTA 6 beyond “next month.” Rockstar let Edge watch 90 unscripted minutes of GTA 6, if you want a sense of what is coming.
Profit held up for a duller reason. Hood said the Devices and Consumer segment’s operating income rose 2% and its operating margin rose to 35%, “driven by lower amortization of intangible assets from the Activision acquisition.” That segment also holds Windows and search, and its operating expenses fell 3%, which Hood said was “driven by XBOX.”
The Verge describes Xbox’s fiscal year so far as dominated by a “reset,” with thousands of layoffs and studios spun off. The studio side of that is in our report on Ninja Theory and Undead Labs. The Verge also quotes a memo from Sharma earlier this year promising “we will return Xbox to player and revenue growth” by the end of fiscal 2027, which runs through next June.
We’d watch the third-quarter guidance more closely than the second-quarter number. If growth only shows up in the quarter with Modern Warfare 4 and GTA 6 in it, Microsoft will have had a good holiday, not an answer for Game Pass.
