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

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

Microsoft’s gaming group saw a 6 percent increase in revenue year-over-year, according to its latest report. That’s up thanks primarily 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.

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 in terms of market share in the $99.6 billion worldwide gaming industry.

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, and that is one of the big reasons behind the reports that Microsoft and Sony (which is also having similar revenue issues with its hardware) are working on upgraded versions of the Xbox One and PlayStation 4 that they can sell at a higher price than the current models on the market.

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

You can get a new Xbox One with a game today 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 device they can plug back into the top of that price range.

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

Finally, the company also pointed out that it is getting better profit margins from the Xbox division. The company’s “personal computing” division, 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.

But, improved software sales and profit margins would go down a whole lot easier for Microsoft if hardware revenues were steady or growing as we come to the end of the third year of this console generation.

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