Microsoft’s Xbox is Losing Consoles but Fueling Steam’s Growth

Xbox console revenue continues to decline sharply while Microsoft’s gaming strategy increasingly depends on PC distribution through Steam.

Hardware by Katmin on Jan 30, 2026

Microsoft's Q2 2026 earnings report came out yesterday, and the data showed a huge split in the firm. Some aspects of Microsoft's business are doing very well because of the rise of the cloud, but the gaming segment is a whole other story.

During what should have been the best sales time of the year, hardware sales fell by an incredible 32%. People usually buy a lot of consoles during the holidays, but Xbox hardware sales went in the opposite direction.

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Amy Hood, Microsoft's CFO, said that Xbox sales were lower than expected, notably because first-party games didn't do as well as expected. Microsoft also pointed out that there were more PC players than ever before. It's hard to overlook the contradiction.

The hardware is breaking down, the money is going down, and the number of players is purportedly at an all-time high. That makes a simple but uncomfortable question: if people aren't buying Xbox systems but are still playing Xbox games, where are they doing that?

Brutal Numbers Behind Xbox’s Decline

When we look at the data more closely, it becomes evident what is going on. Microsoft's gaming revenue fell by $623 million, or 9%, in the most recent quarter. There were two main reasons for this result. First, revenue from content and services, including Game Pass, went down by 5%.

Amy Hood said directly that results were lower than expected because of first-party material, which affected the whole platform. In short, Microsoft's greatest games didn't make a difference.

The second thing was far worse. During the holiday quarter, Xbox hardware sales fell by 32%. Microsoft upped the price of the Xbox by $100 in early 2025. A few months later, the price went up again.

The plan was clear: make up for lower sales by charging more for each console. It didn't work, though. People didn't just quit buying Xbox consoles because they cost more; they stopped buying them because they didn't see the value in them anymore.

First-Party Games Failed to Save the Quarter

This quarter was meant to be a turning point. The Outer Worlds 2, Ninja Gaiden 4, and Black Ops 7 were just a few of the big first-party games that Microsoft released in the second quarter. This was supposed to be the payoff moment after investing $70 billion to buy Activision Blizzard.

Instead, Black Ops 7 had a hard time. Sales in important areas were lower than in Black Ops 6, and Battlefield 6 and other games did better on Steam. The game got mixed reviews when it came out, and it swiftly fell into generally negative territory on Steam, where it had the lowest player counts in the franchise's history.

Amy Hood said that weak first-party performance was to blame for the drop in income, and this failure is exactly what she meant.

Steam Becomes the Center of Attention

This is where Valve's part becomes clear. Black Ops 7 needed Steam to make its low sales statistics, even though the launch was dismal. Microsoft is giving up full control over the Xbox ecosystem in exchange for Steam's full reach. But that reach comes at a high price.

Microsoft gives Valve 20% to 30% of the money it makes from each copy sold on Steam. In a period where gaming revenue is already down 9%, it's hard to accept that you have to give that share to a competitive platform. Microsoft is helping Valve stay on top because it doesn't have any other good options.

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Record PC Players, Shrinking Revenue

Microsoft's leaders tried to change the story during the results call. They said that this quarter, the company had the most PC gamers ever. That sounds like success on the surface. But as we put the pieces together, the story changes.

How can the number of users be at an all-time high when hardware sales are down 32% and overall gaming sales are down 9%? It's easy to see why. Microsoft is recognizing anyone who plays PC games like Call of Duty or Forza as an Xbox user, no matter where they bought the game.

Steam broke records by having more than 42 million users at once and making $1.6 billion in a single month. When Microsoft talks about record PC players, they really mean that their games are selling on Steam instead of the Microsoft Store.

Xbox Becomes Just Another Steam Publisher

To see how far this change goes, we need to look at leadership. Phil Spencer did not respond as a rival when Valve introduced new hardware. Instead, he praised Valve and said that Xbox is one of the biggest publishers on Steam, which is good news for players. That comment didn't sound like confidence; it sounded more like a white flag.

Microsoft has publicly said that hardware sales will keep going down year after year. This means that the Xbox system is basically on life support. The company is slowly changing from a platform holder to a third-party publisher. The open PC ecosystem had already won before Valve even came out with a new Steam Machine.

Philosophical and Technical Divide

Valve is winning this lengthy game for a more technical reason. It's all about philosophy. Microsoft is putting more and more effort into making the PC an AI-first computer. Valve, on the other hand, is still focused with making it a gaming-first device.

Microsoft's income from personal computers declined by 3% this quarter, and anyone who has used Windows 11 recently knows why. The operating system is getting more and more AI features that a lot of people never asked for.

Valve, on the other hand, has been giving money to open-source projects like Mesa and Proton for years. Valve developers are still some of the most active donors to open-source graphics drivers. This keeps Linux a clean, high-performance alternative to Windows, which is becoming more and more congested.

Microsoft, Xbox is Losing Consoles, Fueling Steam Growth, NoobFeed

End of the Console War

In 2026, buying a Steam Machine is like buying a ticket out of Microsoft's world. Microsoft may be happy that more people are playing PC games than ever before, but a lot of those users are silently looking for a way out. As more and more people use Linux, gamers are making it clear that an open, clean platform is more important than ever.

It looks like the console battle is coming to an end. The industry is entering a time where there will be a global PC ecosystem. This means that you can play almost all of the top Xbox games on Steam with greater community features, more support, and no subscription price for online play.

Microsoft will make it through. It is still a trillion-dollar business with a lot of ways to make money besides gaming. But as a brand of consoles, Xbox is very much done.

Xbox the publisher is all that is left. It wasn't the $623 million decline in revenue that shocked me the most about this results call. It was the understanding that Microsoft needs Steam to be successful because that's where its games are truly selling.

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