Retailers were always going to drop Xbox over Game Pass

The decision by Costco to drop Xbox hardware from its stores may feel like a milestone, but the road on which that milestone is located is one we’ve been travelling for quite some time.

Bricks-and-mortar retailers have been gradually shrinking the shelf space devoted to Xbox for several years, and in many countries, it’s increasingly rare to find Xbox products even on online retailers.

Specialist retailers still stock Xbox products, of course, but generalist retailers are tapping out. It’s not a stretch to imagine that within the next year or so, Xbox products will be almost exclusively the preserve of specialist outlets and Microsoft’s own online store.

A decade ago, retail giving up on Xbox in this way would have been a serious warning sign, interpreted as an indicator that Microsoft was on the way out of the console business entirely.

Now, though, the signals are a bit more mixed. Only this week we saw data suggesting that Xbox owners are more actively engaged than gamers on other platforms (at least in terms of the number of games they play), and Microsoft and Asus opened preorders for the high-end Xbox-branded gaming handhelds they have co-created. By some metrics, Microsoft’s games business is certainly active, and even healthy.

Regardless, it would take an incredible amount of spin – and a very credulous audience – to claim that being dropped by mass-market retail is actually a good sign for Xbox. If the hardware were truly competitive with PlayStation and Switch in the market, this wouldn’t be happening. The significant price hikes earlier this year for consoles already being outsold by their competitors were just another nail in the coffin.

You can, however, frame these events a little more sympathetically in the context of Microsoft’s broader strategic shift. At every turn in recent years, Microsoft has doubled and tripled down on Game Pass. That is the absolute core of its gaming strategy, and the company has made clear that every other aspect of the business is secondary to the ambition of building the Game Pass pillar.

Sales of the company’s first-party games, for example, almost certainly suffer because of launch day availability on Game Pass, but that’s seemingly judged to be an acceptable cost if it increases subscriber numbers and retention.

Retail sales are a sacrifice on the same altar. The success of Game Pass and of Microsoft’s digital distribution strategy more broadly has sidelined physical software sales to a greater extent on Xbox than on any other platform.

According to data provided to GamesIndustry.biz by Dorian Bloch at NielsenIQ/GfK Entertainment, Microsoft’s console accounted for just 11% of physical game sales in the UK in 2022, with Nintendo on 48% and Sony on 40%. The predicted numbers for 2025 are far lower, with Microsoft at just 6%, compared with 52% for Nintendo and 42% for Sony.

It’s a similar story in the US, where Mat Piscatella from Circana has confirmed to GamesIndustry.biz that Xbox is by far the most digital-forward platform, with sales of physical software on the platform trailing behind the numbers for Nintendo and Sony.

From the perspective of retailers, that makes it hard to justify supporting Xbox in a meaningful way. Sales of the hardware aren’t great to begin with (Bloch says that Microsoft claimed a 31% share of UK console sales in 2022, but that number is predicted to fall to just 13% in 2025), so with physical software sales dwindling to a trickle, Xbox just isn’t a good use of their bandwidth. Their decision to drop or de-emphasise the consoles in their stores and online platforms is perfectly logical given their own business incentives.

Does this still matter to any great extent, though? A decade ago, certainly, being dropped by major retailers would have been interpreted as a death knell – but today, Microsoft is in the Game Pass business, and Xbox consoles are just one way to access that multiplatform service.

The company understood perfectly well what it was doing when it launched the “This is an Xbox” marketing campaign. Effectively telling consumers that they don’t need an Xbox because they already own a device capable of playing Xbox games was always going to come at a cost to hardware sales.

Losing mainstream retail channels will be another blow to those sales, but if consumers are still engaging with Xbox and Game Pass on other devices, Microsoft will be satisfied with the trade-off.

I wouldn’t go so far as to say that retail pulling back won’t hurt, however. That’s the nature of trade-offs; you may judge the transaction worthwhile overall, but that doesn’t mean that one side of the balance doesn’t hurt. The focus on Game Pass and the multiplatform strategy makes losing retail support far less impactful than it would have been in the past, but it does still matter.

Lacking physical retail presence for Xbox will rob it of certain opportunities to reach new consumers and market the platform. That is a particularly damaging prospect given that Sony and Nintendo still have healthy amounts of shelf space at retail. It will hurt more at specific points – in the pre-holiday sales season, for example, Xbox will now lack a presence in many of the venues where people are gift shopping.

It’s worth noting, though, that while Microsoft remains unique in the extent of its commitment to the subscription model for gaming, the shift to digital distribution is very much a factor for Sony and Nintendo as well. Their own digital transitions are also proceeding apace, and they may land them in a similar situation with mainstream retailers in the coming years.

Microsoft remains unique in the extent of its commitment to the subscription model for gaming

(Piscatella notes that spending on physical software in the US has fallen to just $1.6 billion for the 12-month period ending July 2025 – an all-time low since tracking began in 1995. By contrast, total spending on video-game content in the US amounted to $50.8 billion for the same period, according to data from Circana Games Market Dynamics and Sensor Tower.)

While Microsoft may be willing to accept disengagement from retail as a cost of its Game Pass strategy, that doesn’t mean it should ignore the need for damage control. Getting your products out in front of people in the real world remains an important part of the consumer sales process no matter what line of business you’re in.

As we turn to winter and the gift buying season approaches in many markets, the company would do well to explore alternative ideas for how to get Xbox and Game Pass in front of consumers. It may be able to afford dropping out of retail, but it certainly can’t risk dropping out of consumers’ headspace.