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Microsoft’s AI Business Thrives While Xbox Struggles

30/1/25

By:

Amitabh Srivastav

Azure and AI Drive Growth, But Gaming Hardware Revenue Plummets

Azure and AI Drive Growth, But Gaming Hardware Revenue Plummets

Introduction

Microsoft’s latest financial results highlight a booming AI and cloud business but a struggling gaming division. The company reported a 12% year-over-year revenue increase, driven largely by its Azure cloud services and AI expansion. However, Xbox hardware sales fell significantly, underscoring shifting priorities in Microsoft’s gaming strategy.

AI and Cloud Drive Microsoft’s Growth

CEO Satya Nadella announced that Microsoft's AI business has surpassed a $13 billion annual revenue run rate, marking a 175% year-over-year growth. Meanwhile, the Azure and cloud services segment saw a 31% increase, slightly lower than the previous quarter’s 33% rise but still a key growth driver.

Xbox Hardware Sales Decline, But Game Pass Grows

The gaming division struggled, with overall gaming revenue dropping 7% and Xbox hardware sales declining 29%. Microsoft’s recent shift away from hardware-focused strategies, such as bringing first-party games to other platforms, may have contributed to this downturn.

However, Xbox Game Pass continues to perform well, with a 2% increase in content and services revenue. Nadella also noted that Xbox Cloud Gaming saw a record-breaking 140 million hours streamed, and the recently launched Indiana Jones and the Great Circle has already surpassed 4 million players.

Windows OEM and Devices See Modest Growth

Microsoft’s Windows OEM and Devices division experienced a 4% year-over-year growth, up from 2% in the previous quarter. However, the company expects a decline in Q3 2025, signaling a potential slowdown in the PC market.

Looking Ahead: AI, Gaming, and OpenAI Partnership

Despite challenges in gaming hardware, Microsoft remains optimistic about its AI and cloud expansion. Nadella reaffirmed that Microsoft is “very happy” with its OpenAI partnership, even as adjustments are being made to their collaboration.

In gaming, Microsoft expects revenue to grow in low single digits in Q3 2025, with Xbox hardware sales continuing to decline. Meanwhile, the company’s new multi-platform strategy may determine Xbox’s future direction.

Conclusion

Microsoft’s AI-driven success underscores the company’s strategic shift towards cloud and artificial intelligence, while Xbox hardware struggles as Microsoft moves towards a content-first gaming model. Whether this shift proves successful remains to be seen, but for now, AI is the company’s strongest growth engine.

Stay tuned with Kushal Bharat Tech News for more updates on Microsoft, AI, and the gaming industry.

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