Microsoft’s Xbox sinks as AI soars

Microsoft crushed its latest quarter’s earnings, beating analyst estimates on the top and bottom lines, but amidst the celebrations for higher-than-expected earnings per share and revenue, the company did disclose potential problems in one unit.

Sales of Xbox hardware continue to shrink as the console’s latest iteration enters its fourth year on shelves. Hardware revenue for the Xbox division was down 31% in the most recent quarter due to lower sales. That follows a year-over-year drop of 30% in the same quarter in 2023.

Microsoft is hardly alone when it comes to slowing game console hardware sales. Sony, in February, revised its projections, saying it expects to sell 4 million fewer PlayStation 5 systems in its fiscal year than it had previously forecast.

Price cuts can act as a stimulus to move hardware, but those are usually made around either holidays or major game releases—and both Microsoft and Sony are looking at fairly slow years for big first-party games. (The next big catalyst in the industry is expected to be the release of Grand Theft Auto VI, tentatively expected in the first calendar quarter of 2025, but a delay is looking increasingly likely.)

While console sales are stagnating, Microsoft has been working hard to build its game-streaming division, which makes Xbox and PC games available to a much wider audience, as the titles are playable on everything from tablets and smartphones to smart TVs, without requiring people to buy a game system.

That effort is starting to show some returns. Microsoft reported Xbox content and services revenue increased 62% last quarter, largely on the strength of the Activision-Blizzard acquisition. Overall, gaming revenue was up $1.8 billion.

Microsoft does not report the number of Xbox units sold anymore, but a comment from Take-Two earlier this year said there were roughly 77 million current generation systems in homes. Based on Sony’s reported numbers, that led analysts to conclude that approximately 25 million Xbox Series X and Series S units have been sold, a disappointing number given the industry’s reach.

Microsoft isn’t giving up on game hardware. The company has said it will announce something new “this holiday” and is hard at work on a next-generation Xbox. The release date of that system is unclear.

This story was originally featured on Fortune.com