The Decline of “Fortnite” Is Hurting Microsoft’s Gaming Business

Microsoft (NASDAQ: MSFT) late last week impressed investors with solid numbers for its fourth quarter. Its revenue and adjusted earnings rose 12% and 21%, respectively, buoyed by the growth of its commercial cloud business, which grew its revenue 39% annually and accounted for nearly a third of its top line.

However, Microsoft’s gaming business was a soft spot in the earnings report. It posted a 10% annual decline in revenue and missed its own expectations. Xbox hardware sales plunged 48% annually, while sales of Xbox software and services — a bright spot in previous quarters — slid 3%.

Soft demand for Xbox consoles isn’t surprising since the Xbox One is nearly six years old and gamers anticipate new consoles next year. Soft sales of video games were also expected due to a lack of major game releases during the quarter. However, Microsoft also noted that it faced a “tough comparable” from lower sales of an unnamed third-party title.

Niko Partners analyst Daniel Ahmad claimed that title was Epic Games’ Fortnite and that gamers are spending significantly less cash in the free-to-play game. Let’s see how Fortnite’s decline is affecting Microsoft, and whether or not it will weigh down its gaming revenue in fiscal 2020.

Are gamers losing interest in Fortnite?

Fortnite launched two years ago and is currently available on Windows, macOS, iOS, Android, the PS4, Xbox One, and the Nintendo Switch. The game has three main modes: a shooter-survival mode, a battle royale mode, and a creative mode for building worlds and battle arenas.

Fortnite generates revenue by selling V-bucks, an in-game currency that can be spent on cosmetic skins, dances, and pre-released game modes for certain characters. It generated $2.4 billion in revenue in 2018 according to SuperData, making it the year’s highest-grossing free-to-play game with over 200 million players worldwide.

But 2019 was a much tougher year for Fortnite. Revenue fell 48% month-over-month across all platforms in January, according to SuperData. The firm also recently claimed Fortnite generated $203 million in revenue in May, marking a 38% drop from a year earlier.

Newzoo also recently reported that Fortnite continues to lose viewers on Twitch. As a result, Tencent‘s (NASDAQOTH: TCEHY) Riot Games, the publisher of League of Legends, overtook Epic (which Tencent also holds a stake in) as the most-watched publisher on Twitch in the second quarter.

Newzoo still ranks Fortnite as the fifth most popular core PC game worldwide, but it clearly peaked as it faced tougher competition from similar games like Electronic Arts‘ Apex Legends and Activision Blizzard‘s Call of Duty: Black Ops 4. It also faces fierce competition on mobile devices from games like PUBG Mobile and NetEase‘s Knives Out.

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