Game Over? Microsoft is a massive company with hundreds of billions in revenue from dominant businesses. That includes its 365 software suite and its Azure cloud computing. But lately it's the firm's relatively small videogame business that seems to be dominating the conversation about the company and its recent missteps.
Analysts expect that Microsoft's gaming revenue, which includes software sales and Xbox hardware, shrunk 7.5% in the just ended fiscal year, to $21.7 billion, according to Visible Alpha. That would represent roughly 7% of total sales on the year.
Before the AI boom, gaming was a significant part of Microsoft's growth story, says D.A. Davidson analyst Gil Luria.
"The reality is that it is now a very, very marginal piece of Microsoft's growth strategy, if it's a piece at all," Luria says.
Microsoft is aware of its Xbox issues. In February, the company named Asha Sharma as the new CEO of Xbox. On June 10, Sharma laid out a 100-day plan to restructure the business.
On Monday, she began implementing those changes. In a letter to employees Sharma wrote that Xbox would be cutting 3,200 jobs throughout fiscal 2027, including about 1,600 jobs starting on Monday.
"Our business today is not healthy," Sharma said in the memo. "We are operating at margins that are 3-10x lower than comparable platform and publishing businesses." Sharma said, adding that in a typical year, Xbox lost 64 cents for every dollar it invested.
Microsoft stock fell 1% on Monday following the announcement. Shares are down 21% over the last 12 months. Wall Street lays some of the blame on the Xbox.
"The gaming business is both gross dilutive and margin dilutive," Luria says. "It's hurting their stock price every day, and their job is to serve shareholders, and the best interest of shareholders is to eliminate businesses that are gross dilutive and margin dilutive and gaming is both."
Tech site The Information reported last month that Microsoft was considering options for Xbox, including a potential spinoff or creating a joint venture with other partners as it looks to overhaul the unit. Either option could make the gaming business easier to sell.
An Xbox spokesperson told Barron's this week that "Xbox is not for sale."
But Luria says that could could still change. He sees a future where the new CEO has improved the business enough to make it an attractive opportunity for private equity.
"Xbox is a good business with good modes, Luria says. "It's just not a good fit for public markets. And it's definitely not a good fit for Microsoft," Luria said.
It wasn't always this way.
Luria said that about five years ago -- before megacap tech started investing heavily in AI -- companies like Microsoft had excess amounts of capital. Microsoft decided to take that cash and make gaming purchases, including completing one of the largest tech acquisitions of all time.
In 2022, Microsoft announced that it was going to acquire Activision Blizzard, the gaming studio responsible for Call of Duty. The acquisition didn't close until 2023 and cost Microsoft about $70 billion, making it one of the largest tech acquisitions ever.
Nick McKay, videogaming and digital entertainment analyst at Freedom Capital Markets, told Barron's that Microsoft was likely trying to use the promise of gaining access to Call of Duty as a part of Game Pass -- a digital gaming subscription service -- to incentivize people to sign up for the subscription and make it "the Netflix of videogames over time."
"That just didn't happen," he said.
Now the massive deal is being recast as a mistake, as Xbox weighs on Microsoft's business. The company reported in April that fiscal third-quarter Xbox hardware revenue declined 33% from the prior year while gaming revenue fell 7%.
Now Microsoft is betting big on AI and needs more capital to do so. To Wall Street, Xbox has become an unnecessary distraction.
Write to Angela Palumbo at angela.palumbo@dowjones.com
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July 07, 2026 16:18 ET (20:18 GMT)
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