Microsoft Xbox Reset Cuts 3,200 Jobs and Spins Off Four Studios

Microsoft is cutting 3,200 jobs from its Xbox division as part of the largest reset in the gaming unit’s 25-year history, the company said Monday, with 1,600 of the gaming cuts taking effect immediately. The layoffs fall inside a wider company-wide reduction of about 4,800 jobs, roughly 2.1% of Microsoft’s global workforce of 228,000, and include the divestiture of four of Xbox’s owned game studios.

The reset, led by Xbox chief executive Asha Sharma, is the sharpest acknowledgement yet from Xbox that the gaming strategy Microsoft has pursued since its $68.7 billion acquisition of Activision Blizzard has not paid off. In a bluntly worded staff memo, Sharma wrote that “Our business today is not healthy,” and added that “we spread ourselves too thin.”

The Cuts Inside Xbox

Xbox is taking 3,200 of the 4,800 cuts Microsoft announced Monday. Sharma told staff that the cuts amount to roughly 20% of Xbox’s head count, with 1,600 positions eliminated immediately and the remaining 1,600 to follow by the end of fiscal year 2027.

The cuts come alongside four studio divestitures and a deepening review of a fifth. Chief People Officer Amy Coleman, who delivered the company-wide memo, said the layoffs were concentrated in Microsoft’s Commercial business and Xbox. Coleman added that the division’s restructuring would “position the business for long-term success.”

The financial backdrop is what Sharma has spent recent months telegraphing. Microsoft reported a 7% decrease in quarterly gaming revenue in its most recent results, driven by a 33% drop in Xbox hardware revenue and a 5% decline in Xbox content and services. Sharma told Fortune that the unit had invested over $20 billion in content and hardware over the past five years, excluding the Activision Blizzard deal, yet annual revenue declined by nearly half a billion dollars over the same period.

A Bill Coming Due on the Studio Spree

The Xbox reset is the visible payoff of a five-year strategy that started long before the Activision deal. Microsoft closed its $68.7 billion acquisition of Activision Blizzard in October 2023 after more than 600 days of regulatory scrutiny, adding Call of Duty, World of Warcraft, Candy Crush and Diablo to the Xbox catalogue. Since then, Xbox has cycled through additional studios and chased a multi-platform, subscription-led growth model built around Game Pass.

That model did not deliver the returns the company projected. Sharma told Fortune that the unit’s operating margins now run “three to 10 times lower” than comparable businesses, a gap she attributed to surging component costs, an overextended studio system, underfunding of popular franchises and overreliance on outside vendors. A surge in memory chip prices tied to data center demand has forced Microsoft to raise Xbox console prices, Sharma said, while demand for the consoles was already softening.

The verdict in Sharma’s memo was pointed. “In order to grow, we made a bunch of bets,” she told Fortune, “and as we did that, we inherently didn’t focus on the core business. The number one measure of your strategy is what you put your resources behind, and we simply spread ourselves too thin.” She told staff that returning focus to the flagship Xbox console, which she said represents 80% of the business, is now the priority.

Inside the unit, Sharma is reshaping who runs what. The company is installing its first-ever Xbox chief operating officer, Helen Chiang, who will be accountable for profits and losses across content, hardware, platform and services. Major franchises including Candy Crush-maker King and Minecraft-maker Mojang Studios will now report directly to Sharma. Dave McCarthy, a 17-year Xbox veteran who led platform and hardware efforts, is retiring.

What Sharma Is Resetting

The reset moves Xbox from a decentralized studio model to a more centralized one, stripping out management layers and consolidating decisions in Sharma’s office. Microsoft said it would “transition” four studios “to operate under new management, with the goal of preserving both their intellectual property and ongoing projects,” per Coleman’s company-wide memo.

Sharma is also pulling back from the exclusive-titles strategy that defined Xbox under her predecessor. Microsoft has increasingly been releasing its games on rival platforms, including PlayStation and Nintendo Switch, to widen the audience for franchises that no longer pay for themselves in console sales alone. Sharma has revived exclusive titles such as Gears of War: E-Day and told Fortune she plans to expand consumer financing programs like “buy now, pay later” to lower the barrier to entry for new hardware. She framed the cuts in her memo as “about a bigger future for Xbox, not a smaller one.” Sharma also wrote that “History is full of companies that mistake longevity for inevitability. We will not be one of them.” Microsoft told investors that returning Xbox to growth is targeted for 2027.

AI Capital Pressure Sets the Timing

The layoffs come as Microsoft, Alphabet, Amazon and Meta are on track to spend close to $700 billion combined on AI buildouts in 2026, according to Reuters reporting cited by USA Today. Microsoft alone is projected to spend $190 billion in 2026, a figure the company disclosed in an April spending outlook that surprised Wall Street on the upside.

Coleman’s memo addressed the AI question directly. She drew a careful line, telling staff that the work being cut is not a direct AI substitution even as automation keeps reshaping daily tasks inside Microsoft.

The roles eliminated today are not being replaced by AI. At the same time, what is true is that AI is changing how work gets done.

The structure of the cuts reflects that distinction. Microsoft said the layoffs fell mostly within its Commercial business and Xbox, building on a $2.5 billion push the company announced the prior week to embed 6,000 engineers inside enterprise clients to accelerate AI adoption. Earlier this year, Microsoft offered voluntary buyouts to roughly 7% of its US workforce, or about 9,000 employees, and more than 30% of eligible employees opted in.

The cuts also arrive as investors have begun to push back on Big Tech’s capital plans. Microsoft’s stock is down about 23% in the first half of 2026, its worst first-half performance since 2022, and fell another 1.4% on Monday. Gil Luria, managing director at D.A. Davidson, said Microsoft “has been managing down its workforce in order to pay for its AI investments,” a read that lets the company “accelerate revenue growth while maintaining the same margins.” Parth Talsania, CEO of Equisights Research, called the cuts “portfolio reallocation and operating discipline rather than a fresh catalyst for the stock.”

Four Studios on Their Way Out

Four Xbox studios are leaving Microsoft as part of the reset, with a fifth entering a review process that could lead to closure. Three of the four sit in the United States; the fourth is based in France.

Compulsion Games and Double Fine Productions will “transition” back to independent operation, retaining rights to all of their intellectual property and receiving runway funding to help them find new investors and publishers. Ninja Theory, the developer behind Senua’s Saga, and Undead Labs, which is working on State of Decay 3, have signed contracts to “join new ownership” with funding to complete their in-development projects, though Microsoft has not yet named the buyers.

In France, Arkane Studios has begun a required consultation with its Works Council to review what Sharma called “potential strategic options,” a process that could lead to further closures or a sale. Arkane, the developer behind Dishonored, is currently working on Marvel’s Blade, a single-player game set in Paris. Per Game File, the selling and spinning off of these studios accounts for more than 300 jobs leaving the Microsoft Gaming division.

What the Reset Costs in the Near Term

Inside Microsoft, the human cost is being absorbed through a mix of severance, redeployment and voluntary programs. Microsoft said it provides financial support and resources to departing employees, including AI-skilling training. The 30% opt-in rate to the recent voluntary retirement program suggests many affected positions are being absorbed by people who chose to leave, not by involuntary cuts. Still, the immediate Xbox cuts of 1,600 are involuntary, and the remaining 1,600 will land by the end of fiscal year 2027.

Sharma acknowledged in her memo that the year-long restructuring “creates additional challenges” for staff. “I know this is painful,” she wrote. “These changes will directly affect people who have poured their creativity into building Xbox. Many joined us through acquisitions, while others were recruited here, or sought us out because they loved this industry and loved Xbox. Today’s decisions do not reflect their talent or dedication.” Sharma has pledged to return Xbox to growth by 2027.

Frequently Asked Questions

How many Microsoft jobs are being cut?

Microsoft is eliminating about 4,800 roles, roughly 2.1% of its global workforce of 228,000, according to Chief People Officer Amy Coleman’s July 6, 2026 memo. Of those, 3,200 sit in the Xbox division, with 1,600 effective immediately and 1,600 to follow by the end of fiscal year 2027.

Which Xbox studios are being divested?

Four studios are leaving Xbox: Compulsion Games and Double Fine Productions are becoming independent studios, while Ninja Theory and Undead Labs are being sold to new owners. Arkane Studios has entered a required consultation with its Works Council in France, a process that could lead to a sale or closure.

Is AI replacing the Microsoft workers being laid off?

No. Coleman wrote in her memo that the positions being cut are not direct AI substitutions, even as she acknowledged that AI is changing how work gets done inside Microsoft. Analysts have framed the cuts as portfolio reallocation to fund AI infrastructure spending rather than direct AI substitution.

When did Microsoft buy Activision Blizzard?

Microsoft closed its $68.7 billion acquisition of Activision Blizzard on October 13, 2023, after more than 600 days of regulatory review. The deal brought Call of Duty, World of Warcraft, Candy Crush and Diablo into the Xbox catalogue.

Why is Xbox being restructured now?

Xbox chief Asha Sharma told staff that the unit’s “business today is not healthy,” with operating margins three to 10 times lower than rivals, a 33% drop in Xbox hardware revenue in the most recent quarter, and rising component costs. The cuts also come as Microsoft redirects spending toward AI infrastructure, with the company projected to spend $190 billion on AI buildouts in 2026.