Xbox is losing the console war against PlayStation and Switch

microsoft’s Xbox has had a wild year.

A flurry of layoffs, price hikes, and studio closures have led many — not for the first time — to declare that Xbox is dead.

Laura Fryer, a former executive producer at Microsoft Game Studios, said in June that the company appears to have “no desire or literally no ability to ship hardware anymore.”

In October, former Microsoft executive and former Blizzard Entertainment president Mike Ybarra blasted Xbox’s “disruptive” strategy in a now-deleted X post, saying the company could be headed for “death by a thousand needles.”

According to Microsoft’s fiscal 2026 first-quarter financial results, the company’s overall gaming revenue decreased by 2% year-on-year, and Xbox hardware sales decreased by 29%.

A recent report from research firm Circana found that hardware spending in November, typically a busy shopping month, was down 27% year-over-year, putting the entire console industry into a deep recession.

This past November was the worst November in 20 years, IGN reported, citing data from Sarcana.

According to IGN, combined sales of Switch and Switch 2 fell by more than 10% in the same month, and PS5 sales fell by more than 40%. However, Xbox Series hardware was hit the hardest, with sales down 70%.

Xbox can hardly see the leader in console sales this year.

nintendoAccording to the company’s latest financial report, the Switch 2 has sold 10.36 million units since its release in June. sonyAccording to the latest financial report, 9.2 million PlayStation 5 units were sold in 2025.

According to data from game sales tracking site VGChartz, Microsoft’s Xbox Series S and Series X sold 1.7 million units, but failed to surpass the original Nintendo Switch, which was released in 2017 and has sold 3.4 million units so far this year.

Microsoft declined to comment on Xbox sales or numbers.

The company stopped reporting console unit shipments in 2015 as the gap between Xbox and PlayStation widened.

The Series S, Series X, and PS5 were all first released in 2020 and have since released several updates.

In November, Valve made waves with its next-generation Steam Machine, scheduled to launch next year.

The reveal of the console/PC hybrid generated buzz across the gaming industry, with The Verge declaring, “Valve has just built the Xbox of Microsoft’s dreams.”

The Mini Cube will be able to run Windows PC games as a TV console or gaming computer via Valve’s own Linux-based SteamOS. Gamers will now have access to Steam’s extensive library of thousands of games.

But Microsoft doesn’t seem too worried about falling behind.

“We’re not in the business of outsmarting Sony or Nintendo. There’s really no great solution or win for us,” Microsoft Gaming CEO Phil Spencer said in a 2023 podcast.

Congratulating Valve on the release, the head of Xbox gave a nod to the move to expand access to games “across PC, consoles, and handheld devices.”

As Sony and Nintendo establish themselves as hardware companies, Microsoft is moving toward Bill Gates’ original vision of building a comprehensive entertainment hub in the living room.

“Ultimately, it’s a market that’s accessible to anyone who wants to play games, and Microsoft wants to serve that market,” Wedbush analyst Michael Pachter told CNBC.

Microsoft CEO Satya Nadella said in a recent interview on the TBPN podcast that the company’s gaming business model will be “everywhere on every platform,” from consoles to TV to mobile.

His comments suggest that the next Xbox could function more like a PC.

“It’s kind of funny that people think of consoles and PCs as two different things,” Nadella said. “We built the console because we wanted to build a better PC that could perform well for gaming. So we want to rethink that conventional wisdom.”

Xbox president Sarah Bond agreed, saying in a recent interview with Mashable that the company’s next-generation console will incorporate “some of the thinking” seen in Xbox’s new handheld, made by hardware maker Asus in partnership with Microsoft.

The devices, launched in October, support cross-platform gaming and can run PC games purchased from Epic Games, CD Projekt, and Valve stores.

Xbox has already incorporated that approach into its latest Backbone Pro, which rolled out in November.

Designed in partnership with Backbone Labs, the portable game controller provides access to cloud gaming on your mobile, PC, smart TV, and other streaming devices.

So what will Microsoft’s new generation console look like?

Little is known about what stage of development the company is at.

A person familiar with Xbox’s strategy told CNBC that the company is considering building an open system that would allow players to move between consoles, PCs, cloud gaming and all forms of entertainment other than games.

Pachter said Microsoft isn’t completely abandoning hardware, but the company is dividing its customers between existing buyers interested in dedicated consoles and the rest of the population.

In a 2019 interview with The Verge, Spencer said he was less interested in focusing on selling consoles than making games accessible.

“As we look at the next 10 years of gaming and reaching over 2 billion people around the planet who play games, I think many of those people won’t buy consoles or gaming PCs,” Spencer said.

The Xbox Game Pass subscription service, which provides subscribers with access to games from a variety of publishers, is a clear example of this strategy.

Microsoft has steadily expanded the titles it offers with this service.

The platform’s most basic tier, Game Pass Essential (formerly Game Pass Core), launched in 2023 for $9.99 and includes 36 games, and currently offers more than 50 titles.

Ultimate tier members have access to over 500 titles.

Cloud gaming is growing rapidly.

Xbox reported that Game Pass subscribers will reach 34 million in 2024, with total Game Pass revenue reaching approximately $5 billion in the previous year.

Xbox said in a blog post in November that Game Pass subscribers saw a 45% increase in cloud gaming hours compared to the same time last year. The Microsoft subsidiary also said that console players “spend 45% more time cloud streaming on their console and 24% more time on other devices.”

In announcing the benchmark, the platform added that Xbox Cloud Gaming is now deployed in 30 countries, with the expansion into India, which it calls “the world’s fastest growing gaming market” with more than 500 million gamers this year.

Microsoft faced intense criticism from subscribers after it increased the price of its Ultimate tier by 50% from $19.99 to $29.99 in October, but the company is reportedly testing an ad-supported version of Xbox Cloud Gaming.

George Ziziashvili, senior principal analyst at Omdia, told CNBC that the free Game Pass tier will likely serve as a user acquisition tool, especially for gamers who haven’t invested in a console yet.

However, due to the high costs associated with cloud gaming, the ad-supported tier likely won’t actually generate meaningful revenue, he said.

Cloud gaming is inherently difficult to scale, as it requires balancing computing power with operational costs and user affordability.

“Console-grade cloud gaming essentially requires every instance of your game to run on a server,” Jijiashvili said. “Everyone streaming a game requires specialized hardware, which means it’s not scalable.”

Despite the limitations of scaling games, Microsoft seems committed to doing what it has done with other products and moving it to the cloud.

“They’ve evolved into a company that primarily provides cloud services,” Pachter said. “So everything they’ve done since they started acquiring studios on Xbox has been towards a connected experience for watching entertainment at home.”

Microsoft has spent the past few years building an entertainment hub with a catalog of original games through a flurry of acquisitions.

In 2018, the software giant more than doubled its game studio with a series of acquisitions, including Ninja Theory, inXile Entertainment, and Obsidian Entertainment.

Two years later, Microsoft acquired ZeniMax Media, which owned Bethesda, for $8.1 billion. This was the company’s largest gaming acquisition until its $75.4 billion acquisition of Activision Blizzard in 2023.

Pachter said the software giant’s gaming spree was also a move to gather “enough content” to power its cloud gaming services.

But Microsoft’s approach to leveraging its lineup of exclusive titles has recently seen a big shift.

With Xbox exclusive games still struggling to compete with hugely successful PlayStation games like Marvel’s Spider-Man and God of War, the company made a decisive shift away from its original content strategy.

Bond recently said in an interview with Mashable that the idea of ​​exclusive games is “outdated” as the company leans more toward cross-platform games.

Microsoft announced in October that its next Halo game would be available on Sony’s PlayStation 5, marking the first time a major series has been available on a competing console.

In 2024, Xbox has released four previously exclusive games to other consoles.

Spencer said at the time that the move did not signal a change in Xbox’s exclusivity strategy, but the company has since continued to offer some previously exclusive titles to rival platforms.

In a January interview, Spencer said the company doesn’t intend to “build walls” around where users can participate in Xbox games.

“What we learned is to put the game first and make sure the game is as great as it can be,” he said. “We love the experience on unique hardware, unique platforms, but our games will be appearing in more and more places.”

Microsoft laid off 1,900 people, or about 9% of its gaming division, in January and cut another 650 jobs from Xbox in September.

In May, the company also closed several studios under game publisher Bethesda, including “Redfall” developer Arcan Austin and “Mighty Doom” developer Alpha Dog Games.

The games division took another hit in July when company-wide layoffs caused Microsoft to shelve games Perfect Dark and Everwild, which had reportedly been in development for at least seven years, as well as several unannounced projects.

Some believe the cost-cutting measures are due to increased pressure to meet higher profit targets.

The company has asked its games division to aim for a 30% profit margin in 2023, Bloomberg reported, citing people familiar with the matter.

The target is a significant increase from the 12% profit margin Xbox achieved in 2022, disclosed in court documents, and well above the video game industry’s average standard of 17% to 22%, analysts told Bloomberg.

Microsoft told CNBC that while the company has set ambitious goals, its reported 30% profit margin target is incorrect.

Microsoft has raised the prices of its aging lineup of flagship gaming consoles twice in the past year. Nintendo and Sony also announced price increases for their respective game consoles in August.

PS5 prices currently start at $549.99, while the original Nintendo Switch and Nintendo Switch 2 cost $399.99 and $499.99, respectively.

Xbox’s new ROG Xbox Ally and ROG Xbox Ally X were priced at an incredible $599.99 and $999.99, respectively.

As the number of consoles and handhelds on the market increases, competition for a group of loyal customers who are always interested in owning the hardware is fierce.

But Xbox is betting that cloud and cross-platform gaming is the future.

The demise of the Xbox has been billed for a decade, but what happens next could spell its end for good or be transformative.