More Personal Computing revenue increased $89 million or 1%, mainly due to higher revenue from search advertising and Gaming, offset in part by lower revenue from Windows and Devices. More Personal Computing revenue included an unfavorable foreign currency impact of approximately 2%.
• Search advertising revenue increased $538 million or 55%. Search advertising revenue, excluding traffic acquisition costs, increased 14%, primarily driven by growth in Bing, due to higher revenue per search and higher search volume.
• Gaming revenue increased $64 million or 4%, primarily due to higher revenue from Xbox Live and video games, offset in part by lower Xbox hardware revenue. Xbox Live revenue increased 22%, driven by higher revenue per transaction and volumes of transactions, as well as growth in subscribers. Video games revenue grew 9%, driven by the sales of Minecraft. Xbox hardware revenue decreased 26%, mainly due to a decline in Xbox 360 console volume and lower prices of Xbox One consoles sold.
• Windows revenue decreased $292 million or 7%, mainly due to lower revenue from patent licensing and Windows OEM. Patent licensing revenue decreased 26%, due to a decline in licensed units and license revenue per unit. Windows OEM revenue decreased 2%. Windows OEM Pro revenue declined 11%, driven by a decline in the business PC market. Windows OEM non-Pro revenue grew 15%, outperforming the consumer PC market, driven by reductions in OEM non-Pro channel inventory in the prior year and a higher mix of premium licenses sold in the current year.
• Devices revenue decreased $248 million or 11%, driven by the previously announced change in strategy for the phone business, offset in part by higher Surface revenue. Phone revenue decreased $662 million or 47%, as we sold 2.3 million Lumia phones and 15.7 million other phones in the third quarter of fiscal year 2016, compared with 8.6 million and 24.7 million sold, respectively, in the prior year. Surface revenue increased $398 million or 56%, primarily driven by the release of Surface Pro 4 and Surface Book in the second quarter of fiscal year 2016, offset in part by a decline in revenue from Surface Pro 3.
More Personal Computing operating income increased $596 million or 57%, due to lower operating expenses and higher gross margin.
• Gross margin increased $105 million or 2%, reflecting higher revenue and a slight reduction in cost of revenue. Gross margin included an unfavorable foreign currency impact of approximately 4%. Cost of revenue decreased slightly, primarily driven by a reduction in phone sales, offset in part by higher search advertising and Surface cost of revenue.
• Operating expenses decreased $491 million or 14%, mainly due to lower sales and marketing expenses and research and development expenses. Sales and marketing expenses decreased $308 million or 21% and research and development expenses decreased $174 million or 11%, mainly due to a reduction in phone expenses.