Xbox One is selling better, but lower price drags down Microsoft’s revenues

Microsoft doesn’t provide a lot of details about its Xbox business anymore, but it does share certain key points that highlight how it is performing in the home gaming console sector.

The company’s gaming group saw a 6 percent increase in revenue year-over-year, according to its latest report. That’s up primarily due to strong software performance while Xbox hardware revenues saw a decline. That drop comes even as the Xbox One has sold better (via ZhugeEX) through the first nine months of Microsoft’s fiscal year as opposed to the same period in 2015. Recent rumors have suggested that Microsoft and Sony are keenly aware of how their price was has dampened their hardware revenues in the $99.6 billion gaming market, and that’s why both companies are reportedly working on upgrades for their current generation consoles.

Xbox Live, the company’s online gaming service, had 46 million monthly active players throughout its fiscal third quarter. That’s down 4 percent from 48 million last quarter, which included the busy holiday season. Year-over-year, Xbox Live is up 26 percent from 37 million players. This shows that the company is continuing to grow the service portion of its gaming business, which it has shifted its focus to as the Xbox One has fallen behind the PlayStation 4.

The Xbox division’s jump in revenue is a good sign for Microsoft. It is continuing to grow that business despite its second-place position in the market. But the lower price of each console sold is placing a drag on revenue.

“Xbox hardware revenue declined driven by lower volumes of Xbox 360 consoles sold and lower Xbox One pricing,” reads Microsoft’s report.

Today, you can get a new Xbox One with a pack-in game for $300. That’s down from $500 when it launched in 2013. And while Microsoft has eagerly dropped the price to compete with Sony, both companies likely want a configuration of their respective devices that they can plug into the top end of that price range. This is where the rumored PlayStation 4 Neo and Xbox One.5 come into the picture with upgraded processing components that would command a much higher price.

We have no confirmation yet that either company is really preparing a hardware refresh with more power, but it also won’t surprise many people if Microsoft and Sony announce these devices at the upcoming Electronic Entertainment Expo trade show in June.

But while hardware falters for Microsoft, software grew 11 percent year-over-year in terms of revenues. The company also reiterated that its customers have streamed 10 million hours of Xbox One games to Windows 10 PCs.

Finally, it also pointed out that it is getting better profit margins from the Xbox division. The company’s “personal computing” segment, which includes Xbox, saw an increase in operating income of 57 percent from $1.05 million in Q3 2015 to $1.65 million in Q3 2016.

“Gross margin percentage increased year-over-year driven primarily by margin improvements in Surface and gaming,” reads the Microsoft report.

Surface is Microsoft’s Windows-based line of laptops and tablets.

While Xbox boss Phil Spencer and Microsoft chief executive Satya Nadella are likely thrilled about the improved software sales, increased Xbox One unit sales, and better profit margins, all of that would go down a whole lot easier if hardware revenues were just as healthy as we come to the end of the third year of this console generation.