Xbox’s new boss Asha Sharma has pulled the plug on the console’s AI assistant before it ever left the test phase. Copilot, pitched as a context-aware gaming companion, entered beta on the Xbox app in May 2025 with a full console rollout penciled in for 2026. Those plans are now dead — the feature never made it out of preview.
The decision forms part of a wider recalibration inside Microsoft’s gaming division. Sharma, who arrived from the company’s CoreAI unit, is steering the business back toward its hardware-and-subscription roots. Copilot’s cancellation coincides with the removal of certain mobile gaming features, price cuts for Xbox Game Pass, and a rebranding of the gaming unit to simply “Xbox.” The message is clear: AI will serve specific problems — better real-time graphics, sharper content recommendations, deeper personalization — rather than act as a generic chatbot wrapper.
The urgency behind the pivot is easy to spot in the numbers. Xbox hardware revenue collapsed 33 percent in the third fiscal quarter of 2026. Total gaming revenue slid to $5.34 billion, a drop of nearly seven percent year-over-year. The current quarter looks no brighter: Microsoft expects content and services to decline by a low-double-digit percentage, with hardware falling sharply again.
Raymond James responded by downgrading Microsoft to “Market Perform” on May 5, citing the hardware slump explicitly. The bank dropped its price target — a tacit admission it sees no near-term catalyst for the stock.
The $190 Billion Infrastructure Juggernaut
While gaming struggles, the rest of Microsoft is running hot. The company’s appetite for AI compute has grown so ferocious that it is now willing to compromise its 2030 climate targets. To keep its sprawling data centers powered, Microsoft is evaluating natural gas and nuclear energy — a strategic retreat from earlier environmental commitments that investors have largely shrugged off.
The payoff is starting to materialize. CEO Satya Nadella disclosed that the AI business has reached an annualized revenue run rate of $37 billion, more than double the prior year. Azure growth accelerated to 40 percent in the third quarter, and total cloud revenue hit $54.5 billion. The commercial backlog — contracted but unbilled revenue — surged 99 percent to $627 billion, with roughly a quarter expected to convert into recognized revenue over the next twelve months.
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Capital expenditures are on track to approach $190 billion this fiscal year. That eye-watering figure will dominate the conversation when Microsoft reports fourth-quarter results on July 29. Analysts will be watching Azure’s trajectory closely: sustained growth is the only credible justification for infrastructure spending at this scale.
Margins at Record Levels, Headcount Under Pressure
The financial engine powering all this is humming. Third-quarter revenue reached $82.9 billion, operating income rose 20 percent, and the operating margin hit 46.3 percent — a record for the company.
Yet even with those margins, Microsoft is restructuring. A new voluntary severance program targets roughly 8,000 long-tenured U.S. employees, offering buyouts to reshape the workforce around AI development. The move echoes broader industry trends: legacy roles are being trimmed while AI engineering headcount expands.
Wall Street remains broadly bullish. Fifty-five of 58 analysts maintain buy ratings, with a consensus price target of $576. The stock traded around $414 in pre-market action Thursday, or roughly €354.90 — down about 12 percent year-to-date, making it one of the weaker performers among Big Tech names this year.
A Tale of Two Microsofts
The company presents a study in contrasts. The core cloud-and-AI business is firing on all cylinders, generating cash and backlog at rates that would have seemed implausible two years ago. The gaming division, by contrast, is in retreat — shedding features, cutting prices, and hoping a hardware rebound materializes by summer.
Sharma’s strategy amounts to a bet that Xbox can stabilize without a flashy AI assistant. Whether that bet pays off will become clearer when the fourth-quarter gaming figures land. For now, the market is willing to overlook the console weakness as long as Azure keeps accelerating and the AI revenue machine keeps compounding.
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