Microsoft just hit a $10 billion milestone with its gaming business, and it’s a huge sign for the future of the Xbox (MSFT)

Phil Spencer

Microsoft posted $110 billion in revenue in its 2018 fiscal year, the company announced on Wednesday. That’s the first time Microsoft has passed $100 billion in annual revenue, ever.

Buried in the earnings report is another first: Microsoft’s gaming business generated just over $10 billion in annual revenue. The company says this is the first time that its gaming business has ever crossed that threshold.

In the final quarter of its fiscal year, Microsoft’s overall gaming business grew 39% from the same period in 2017 “driven by higher revenue from Xbox software and services,” the company said in a press release.

To that point, Xbox software and services alone are up 36% over the same period, “mainly from a third-party title,” said Microsoft CFO Amy Hood on a conference call to discuss its earnings report. While Hood didn’t specify which particular game drove such material growth, the most likely suspect is “Fortnite,” the international phenomenon.

That doesn’t tell the full story, though. Over the last year, Microsoft has renewed its push to take its gaming business beyond selling hardware and software, and moving into services. At the same time, it promoted Xbox boss Phil Spencer to the newly-created role of Executive VP of Gaming, to give him more room for this push.

Pass, Mixer and Live: a powerful mix of new services

The clearest example of this is Xbox Game Pass, a $10/month service that gives unlimited access to hundreds of Xbox One games. Game Pass launched in June 2017, and Microsoft has continued to push it — even committing to bringing first-party blockbusters like the upcoming “Forza Horizon 4” to the service on the day they hit store shelves.

Another relative newcomer is Mixer, Microsoft’s answer to the massive success of Amazon’s Twitch. While Mixer isn’t nearly as popular among video game streamers as its rivals, it’s won a loyal community. Microsoft has indicated that Mixer is a major push, as it works to reach gamers on iPhone and Android.

To that end, Microsoft continues its investment on Xbox Live, its online gaming service. It had 57 million active users during the quarter, Microsoft reported. That’s up from the 53 million it had in the same period of 2017, but a little bit down from the 59 million it reported in the previous quarter. It’s free to join Xbox Live, but there’s a $60/year Xbox Live Gold plan with premium features — notably, the ability to play online multiplayer games.

Microsoft CEO Satya Nadella highlighted the combination of Game Pass, Mixer, and Xbox Live as “driving record levels of growth and engagement.” In other words, as much as the Xbox business is still going strong, it’s these less-traditional focus areas where Microsoft is pinning its hopes. And with a $10 billion year for the first time ever, you can only expect Microsoft to dig in.

Finally, to put this in context: Microsoft no longer releases Xbox One sales figures, but it’s generally accepted to be second place to the Sony PlayStation 4 by a country mile. While Microsoft just launched a new Xbox One X console last year, and says that it’s already working on new hardware, it’s clear that the company is hedging its bets.