According to Digital Trends, Microsoft’s gaming revenue fell 2% year-over-year in its fiscal 2026 first quarter, with the real pain coming from Xbox hardware revenue plunging 29%. In November 2025 alone, Xbox Series console sales were down a staggering 70% compared to the previous year. Meanwhile, competitors are thriving: Nintendo’s Switch 2 sold 10.36 million units since June, and Sony moved 9.2 million PlayStation 5 units in 2025. In response, Microsoft executives like Phil Spencer and Satya Nadella are signaling a major strategy shift away from “out-consoling” rivals. Instead, they’re pushing for an “open system” that works across console, PC, and cloud, with even flagship titles like the next “Halo” coming to PlayStation 5.
The brutal math
Look, the numbers here are just ugly. When your flagship hardware is down 70% in the prime holiday shopping month, you have a problem that a new controller color won’t fix. CNBC cites estimates putting Xbox Series sales at about 1.7 million units this year. That’s not just behind PlayStation and Nintendo. It’s behind the original Nintendo Switch, which sold an estimated 3.4 million in the same period. That’s a legacy console from 2017. Microsoft stopped reporting unit sales back in 2015, probably because the news kept getting worse. Now we see why.
The open system gamble
So Microsoft is pivoting. Hard. The new mantra is “open.” Nadella talks about gaming being “everywhere on every platform.” Sarah Bond points to their Asus-built handhelds and calls exclusives “antiquated.” The plan seems to be: if you can’t beat them, join them… by putting your games everywhere. It’s a complete inversion of the traditional console model, which relies on selling hardware at a loss to build a walled garden of software sales. Microsoft is basically dismantling the garden walls and hoping people will pay for a subscription (Game Pass) to access their stuff on whatever screen they have.
Subscriptions are the new battlefield
Here’s the thing: this bet only works if the subscription service becomes a monster. Microsoft reports 34 million Game Pass subscribers and nearly $5 billion in revenue from it last fiscal year. Cloud gaming hours are up 45%. Those are the numbers they’re clinging to. But it’s a tricky pivot. They already faced a huge backlash when Game Pass Ultimate’s price jumped 50% last October. And an ad-supported tier? That feels like a move that could cheapen the premium feel they’re trying to maintain. The economics of streaming are notoriously brutal, and Microsoft is betting it can master them where others, like Google Stadia, failed spectacularly.
The real test coming
I think the biggest risk here is strategic confusion. What is an Xbox if not the box? If “Halo” is on PlayStation, why would a PlayStation owner need any Xbox hardware at all? Microsoft is betting that its platform—the operating system, the cloud saves, the subscription—is the product. But that’s a much more abstract sell than a shiny new console under the TV. The proof will be in the next-gen plan. Will they actually release a traditional, powerful “Xbox Next,” or just a streaming puck or a branded PC? And they’re not just competing with Sony and Nintendo anymore. They’re competing with the living room PC, like whatever Valve cooks up next. It’s a radically different, and much more complex, fight. Basically, Microsoft isn’t just changing its strategy. It’s trying to change the entire game. Again. History suggests that’s incredibly hard to do.
