Microsoft Lays Off 3,200 at Xbox and Spins Off Four Studios

Microsoft has begun the most significant restructure in Xbox history, cutting about 3,200 jobs and parting with four game studios, CEO Asha Sharma said in a memo to staff on Monday.

The cuts, which began with 1,600 layoffs on Monday, arrive with the division’s margins running 3 to 10 times lower than comparable platform and publishing businesses, per Sharma’s memo. They also mark a reversal of the studio-acquisition strategy Microsoft has run since 2018.

The 3,200-Person Bill

The memo, sent to Xbox staff worldwide and republished by Microsoft on Monday, opens with the layoff number and stays there. “After careful consideration, I’ve made the difficult decision to reduce our team by approximately 3,200 throughout FY27,” Sharma wrote. “This will include approximately 1,600 role eliminations today, and in addition, four studios will leave XBOX to new management.”

The reset will run through the full fiscal year rather than land in a single day. Sharma acknowledged the cost of stretching the cuts across the full year and said she wanted to be direct about the scale, beginning with 1,600 cuts on Monday.

• $5.34 billion in Microsoft gaming revenue in Q3 FY26, down 7% year over year
• 23% Xbox’s share of the global console market, per Q1 2026 figures
• Over 5x projected storage and memory cost increase by 2027 holiday season
• $68.7 billion price Microsoft paid to close the Activision Blizzard deal in 2023
• 51.6 million Sony PlayStation Plus subscribers in Q1 2025

Four Studios, Five Different Exits

Four studios are leaving Xbox as part of the reset. Compulsion Games and Double Fine Productions, both acquired in 2018, will return to management and operate as independent studios with their existing intellectual property. Ninja Theory and Undead Labs, two more 2018 acquisitions, have signed terms to be sold to unnamed new owners with funding to complete Senua’s Saga and State of Decay 3.

A fifth studio, Arkane, is beginning a separate consultation with its French Works Council over “potential strategic options,” Sharma wrote, and its future is not yet settled.

Per Stephen Totilo’s Game File newsletter, the spin-outs account for roughly 300 of today’s redundancies, a figure that reflects the studio-level headcount being shed as those teams leave the Xbox payroll.

A Studio System That Lost 64 Cents on the Dollar

Sharma’s case for the cuts runs through a single number. “We have also learned that we are not the best home for every type of studio; in a typical year, we lost 64 cents for every dollar we invested,” she wrote, a margin she attributed to the studio portfolio Xbox built up over the prior generation. The reset is built around three structural moves.

1. Reset the content portfolio. Studios that fit better as independents are being set free with their IPs, and Xbox is shifting investment to higher-priority projects across Activision, Bethesda/ZeniMax, Blizzard, King, Mojang, and Xbox Game Studios. None of the division’s publicly announced first-party games are being cancelled, Sharma said.
2. Reset the platform. Management layers will be cut from as many as 14 to no more than 5, and 3 where possible, with a flatter organization built around individual contributors, “player-coaches,” and directly responsible individuals.
3. Reset how Xbox operates. For the first time, Xbox is establishing a Chief Operating Officer with end-to-end P&L responsibility across content, hardware, platform, and services.

Mojang and King, the two largest Xbox studios by monthly active players, will now report directly to Sharma. “They bring critical geographic, demographic, and differentiation to XBOX,” she wrote.

Flattening 14 Layers Down to 5

The org-chart changes are concrete. Helen Chiang, who has spent nearly two decades at Xbox and most recently led Mojang and the Minecraft franchise, has been promoted to the new Chief Operating Officer role, reporting directly to Sharma. “She will bring our businesses together under one operating model,” Sharma wrote, “making sure we make clear investment decisions, learn from our successes and failures, and hold ourselves accountable for results.”

For 17 years, Dave McCarthy has been with Xbox. He is now retiring. The memo cites a platform team that is 40% larger than it was at the start of the current console generation, even as the player base and playtime have declined. To clear the path from decision to shipping game, vendor spend is being cut in half, code bases are being consolidated, and a flatter management structure is taking shape.

History is full of companies that mistake longevity for inevitability. We will not be one of them.

The fiscal year ahead will carry all of the cuts and the studio spin-outs. What comes next for Arkane and the studios under signed terms to be sold has yet to be disclosed.

The Hardware Crisis Sharma Says Few Peers Matched

Sharma frames the cuts against a macro headwind she says few rivals face as sharply. “The entire industry is facing a components crisis,” she wrote in an earlier June 10 reset memo co-signed with Xbox content chief Matt Booty. That memo projects Xbox will pay over 5x the price for console storage and memory components in the 2027 holiday season than it did just two years earlier, per a breakdown of the memo’s storage and memory cost figures.

When Sharma joined as CEO in February 2026, console storage costs were already more than double what they had been the prior fall. Since then, those costs have doubled again. The June 10 memo frames the squeeze as a binding constraint, with Xbox “currently unable to make as many consoles as players want to buy.” Microsoft’s next-generation console, codenamed Project Helix, is the box that has to clear those cost barriers. Set to ship without a disc drive per a separate report, the next console reflects how the component economics are reshaping the box itself.

What Game Pass Couldn’t Deliver

At the center of the strategy Xbox is now reshaping sits Game Pass, the subscription service Sharma’s memo singles out for not growing fast enough. The service crossed 40 million subscribers in Q1 2026, up from 37 million a year earlier, a roughly 10% gain that the June 10 memo describes as the first sustained growth after eight months of decline. That figure is well short of the 77 million subscribers Microsoft is reported to have projected for the service by 2026, a target surfaced in legal proceedings.

To stabilize the user base, Microsoft cut Game Pass Ultimate from $29.99 to $22.99 a month in April 2026, partially reversing a roughly 50% price hike from July 2025. The April reset also pulled future Call of Duty titles out of Game Pass at launch, with new entries added “during the following holiday season,” about a year later. Existing Call of Duty titles in the library remain available to subscribers. By Sharma’s account, the service she inherited as Xbox’s growth engine is now the line item cited in the case for cutting it.

The service sits at 40 million against Sony’s 51.6 million PlayStation Plus subscribers, per Q1 2026 Xbox subscriber and revenue figures. The gap helps frame why the cuts land now.

2027 in Sharma’s Sights

At the close of the reset memo sits Sharma’s own forward-looking claim. “XBOX has many of the most beloved franchises in entertainment history, talented studios around the world, and we will return to growth in 2027,” she wrote, a target she owns. Per the memo, the fiscal year ahead will carry the full headcount reduction, the studio spin-outs, and a hardware market Sharma called the most severe in the industry’s history.

Per the earlier reporting on the June 10 reset memo, the cost-cutting plan had been expected to land shortly after Microsoft closed its fiscal year on June 30. The July memo delivered the number and the studios.

Frequently Asked Questions

How many Xbox employees is Microsoft laying off?

Microsoft is cutting about 3,200 Xbox jobs across fiscal year 2027, beginning with roughly 1,600 layoffs on Monday. The remaining cuts will run through Microsoft’s FY27, the year the company has designated for the reset.

Which Xbox studios are leaving Microsoft?

Compulsion Games and Double Fine Productions will return to independent operation with their IPs intact. Ninja Theory and Undead Labs have signed terms to be sold to new owners with funding to finish Senua’s Saga and State of Decay 3. Arkane is under a separate French Works Council consultation over “potential strategic options.”

Why is Xbox laying people off?

CEO Asha Sharma’s memo cites three pressures: margins 3 to 10 times lower than comparable platform and publishing businesses, a 64-cent loss on every dollar invested in the studio portfolio, and a hardware components crisis that has pushed storage and memory costs to over 5x their two-year-prior level.

What is Project Helix?

Project Helix is the codename for Microsoft’s next-generation Xbox console. Per a July 2026 report, the box is set to ship without a disc drive as Microsoft works around the storage and memory cost squeeze that has made the current Xbox lineup harder to manufacture at scale.