Microsoft isn't just cutting jobs. It's also stepping away from studios it spent billions acquiring. How did Xbox end up here?
On Monday, Xbox announced the biggest reorganization in its history. The restructuring includes 3,200 layoffs over the next fiscal year, along with moving four studios outside Microsoft's ownership.
This isn't just another round of standard cuts that the games industry has already seen dozens of times in recent years. CEO Asha Sharma called it "the most significant restructuring in the brand's history," and in an internal memo wrote outright that the business, in its current shape, doesn't add up.
Of the 3,200 announced reductions, half, around 1,600 people, lost their jobs immediately. The rest will leave gradually through the middle of 2027. This is part of a wider wave of layoffs across Microsoft itself, which on the same day announced a total of 4,800 eliminated positions. That figure represents about 2 percent of the entire company. Xbox accounts for a small share of the corporation's revenue, estimated at around 6 percent, yet it's this segment absorbing some of the deepest cuts.
Sharma told employees that Xbox's margins are three to ten times lower than comparable businesses, and that the teams responsible for the platform grew 40 percent over this console cycle even as player numbers and time spent in games have been declining.
In the official statement posted on the platform website, Sharma was blunt about the situation: "Our business today is not healthy." She went on to explain that the company had bet on growing Game Pass, multi platform releases, and a broad content portfolio. In the process, she quite clearly distanced herself from the strategy of her predecessor, Phil Spencer, who stepped down as head of Xbox in February when Sharma took over the role. Before that she led Microsoft's CoreAI Product division, and before that she worked at Meta and Instacart.
She also admitted that aggressively buying up development studios hadn't been a good idea in the long run. According to Sharma, every dollar invested returned just 36 cents on average.
One line in particular stood out during the announcement: "We must reset XBOX." It was a clear break from the company's previous direction.
The company had its best years during the Xbox 360 era, when it regularly led sales in the US. Since then, momentum has shifted to Sony. In the current generation, PlayStation 5 versus Xbox Series X, Sony holds nearly half the global market, Nintendo Switch takes about 27 percent, and Xbox is left with just 23 percent.
A pivotal, if controversial, moment was the $68.7 billion acquisition of Activision Blizzard in October 2023. It remains the largest deal in the history of the games industry. Rather than stabilizing Xbox's position, the acquisition brought on further waves of layoffs and canceled projects.
On top of that comes Microsoft's overall top priority, investment in artificial intelligence, which is consuming tens of billions of dollars. AI is also effectively pulling leadership's attention away from games. Rising RAM prices, driven by the AI boom, are additionally squeezing Xbox's hardware margins.
Rather than simply shutting the brands down, Xbox is trying to send some of them off on their own. Double Fine (creators of the Psychonauts series) and Compulsion Games (South of Midnight) will return to the control of their existing management and become independent companies, keeping the rights to the universes they built. Ninja Theory and Undead Labs will go to as yet undisclosed buyers, with funding secured to finish the Senua series and State of Decay 3, respectively. The French studio Arkane is entering a legally required consultation process over its future, which could mean a sale or a spinoff from Microsoft's structure.
This arrangement spares around 350 people from layoffs, but it doesn't shield the rest of Xbox's units. Cuts will also hit Activision, Bethesda/ZeniMax, Blizzard, and Xbox Game Studios. One notable detail: the two strongest mobile and casual assets, Mojang (Minecraft) and King (Candy Crush), will now report directly to Sharma, which hints at where Xbox sees its real strength in player numbers.
Reactions from commentators and creators have been overwhelmingly critical. Bloomberg journalist Jason Schreier describes Xbox's situation as the result of years of inconsistent strategy and costly acquisitions that pulled the company in opposing directions instead of building a coherent business.
Virtual Economy podcast hosts Amanda Farough and Mike Futter judge it even more harshly. In their view, Microsoft burned through a quarter century of brand building and player trust in a matter of days. Futter points out that the scale and pace of the cuts show that no studio is safe, regardless of the quality of the games it makes.
The biggest question now is the fate of the project codenamed Helix. The hybrid machine is meant to combine Xbox and PC gaming. According to Shockley, it's hard to imagine developing a new hardware generation while simultaneously cutting studio teams down to the bone. Some analysts don't rule out that the next console either won't happen at all, or will end up being built by an outside partner.
Sharma insists that none of the publicly announced flagship projects will be canceled, and that games like Senua and State of Decay 3 will continue under their studios' new owners. She admits, though, that this is only the beginning of the process, not the end of it.
