Earlier this week, Microsoft announced its fiscal first-quarter 2020 financial results. While the company enjoyed another bumper period where analyst predictions were smashed, there was some bad news. Specifically, Microsoft’s gaming division led by the Xbox One console saw a significant slump that points to the end of an era. 

Microsoft announced its gaming revenue declined 7% year-on-year over the last three months. Importantly, the drop seems to point to the end of the current generation of console gaming. Still, despite having a plethora of entertainment options like music streaming, casino online services, social media, and streaming services like Netflix, the future of Xbox remains bright. 

So, Microsoft will not be happy about posting a 7% year-on-year drop in its gaming revenue, the company is looking to the future. In terms of specific numbers, Microsoft’s gaming division drew $2.542 billion in revenue, compared to $2.738 billion in Q1 2020. 

Luckily, this decline is explainable as we are now entering the final stages of the 8th generation of the console market. Xbox One (and indeed the PlayStation 4) is nearing the end of the cycle. Microsoft has already confirmed its ninth-generation console, the Xbox Scarlett, with a 2020 launch date in mind. 

With a new generation around the corner, it makes sense that most gamers are willing to wait a year for the Scarlett or PlayStation 5 to arrive. Furthermore, and perhaps more importantly, most of the people who wanted an Xbox One have already purchased one since its launch in 2013. Microsoft does not offer specific numbers of units sold, but the company said during the last quarter hardware sales fell by 34%. 

Other financial details surrounding Microsoft’s gaming output suggests the above points are correct. For example, the company revealed a 0% change in content and services year-on-year. This includes products such as Xbox Game Pass and Xbox Live, suggesting gamers are still interested in Xbox even if they are slowly losing interest in Xbox One. 

And that leads us to the future. Microsoft will understand the market is now pushing it towards Xbox Scarlett, but the ninth generation of consoles will bring Microsoft numerous challenges:

PlayStation 5 – Leading those challenges will be old rival Sony. The Japanese giant has announced its PlayStation 5 will also arrive during holiday season 2020. Despite Xbox One shifting tens of millions of units during its lifetime, the PS4 has vastly outsold Microsoft’s console. Success in one generation does not guarantee success in the next, but there is no doubt Microsoft will be wary of Sony’s threat. 

Cloud Gaming – How people play their games will change in the coming years as the advent of cloud gaming puts console-quality titles on every device. Microsoft is pushing this technology with its upcoming Project xCloud, which is currently in preview testing in the United States, United Kingdom, and South Korea. 

Project xCloud will face major competition from Google Stadia, which will fully launch on November 19. Both services are likely different enough that they will be able to co-exist but expect the cloud gaming market to grow with more companies entering development in the coming years.