Microsoft Corp's (NASDAQ:MSFT) latest earnings report reveals a mixed bag for its Xbox division. Hardware sales have taken a significant hit, dropping 42% year-over-year in the fourth quarter.

This follows a 31% decline in the previous quarter, and although there was a slight uptick of 3% in Q2 due to holiday promotions, the overall trend has been downward. According to IGN, this pattern has persisted for several quarters, with a 7% drop noted in Q1 as well.

Industry-Wide Decline in Hardware Sales

This decline in hardware sales isn't isolated to Xbox alone. Circana's recent report shows that all major console makers, including Sony Group Corp. (NYSE:SONY) and Nintendo ADR (OTC:NTDOY), have experienced double-digit percentage declines in May 2024.

The Nintendo Switch, in particular, saw the most significant drop. These declines indicate the natural life cycle of gaming consoles, as all three major systems are now in the later stages of their current generations. Xbox has acknowledged this trend and hinted at the development of a "next-gen" console, with more information expected around the holiday season.

The Silver Lining: Gaming Revenue Soars

Despite the slump in hardware sales, Microsoft's gaming revenue tells a more positive story. Overall gaming revenue surged 44% year-over-year, setting new quarterly records.

This impressive growth can be attributed to the acquisition of Activision Blizzard, which was not part of Microsoft's revenue stream last year.

The acquisition added a significant 48 points of net impact, suggesting that Xbox's non-Activision-Blizzard business has not performed as strongly as it did last year. However, Xbox content and services revenue saw a remarkable 61% increase year-over-year, with 58 points of net impact from the acquisition.

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