Xbox One hardware falters, but software and services are bright spots

Xbox One hardware sales are continuing to fall, and that put a drag on Microsoft’s gaming division. Xbox revenues for Q1 of fiscal 2020 were down from $2.738 billion to $2.542 billion. The end of the generation is here, and people are less willing to go out and buy new hardware that originally debuted in 2013.

So just like during Microsoft’s Q4 of fiscal 2018, hardware sales are falling.

“Gaming revenue decreased $196 million or 7%,” reads Microsoft’s earnings report. “[That was] driven by a decrease in Xbox hardware of 34%, primarily due to a decrease in volume of consoles sold.”

Microsoft isn’t surprised about this. The company knew Xbox One sales were slowing. That’s why it announced that the next system is coming fall 2020. In the meantime, Microsoft is focusing on getting people onto its Netflix-style Xbox Game Pass subscription service. And that seems like it’s working.

Xbox One hardware can’t distract from improved subscription revenues

It’s not all bad news for Microsoft. The company is seeing some indication that digital subscriptions are picking up momentum.

Xbox content and services revenue was up only 1% year-over-year. And that might seem like a soft gain if Xbox Live and Xbox Game Pass subscriptions are actually catching on. But this segment is up 1% despite a major decline in revenues in other areas.

“Xbox content and services revenue was relatively unchanged,” reads Microsoft’s report. “[That’s] primarily due to an increase in video games and subscriptions, offset in part by a high prior year comparable from a third-party title.”

That mysterious “third-party title” is almost certainly Fortnite. In 2018, that game was making massive amounts of money for developer Epic. But Microsoft was also getting 30% of every microtransaction made on Xbox One. That cash hasn’t dried up, but it isn’t doing as well as last year. And that is hurting the comparison for Xbox content revenues.

However, Microsoft says that video game and subscription revenues offset the decline. That’s a good sign for the company as it looks to build up a loyal Game Pass audience to take into the next generation.