Microsoft Xbox Announces Major Restructuring: 3,200 Layoffs and Studio Divestments

Last month, Xbox executives laid out some “hard truths” about Microsoft’s struggling gaming division that they said would require a difficult “Xbox reset.” This morning, Microsoft revealed the brutal shape of that “reset,” announcing plans for 3,200 layoffs and the divestment of five smaller studios that the company has spent years acquiring and shepherding.

Half of those 3,200 layoffs are effective today, new Xbox CEO Asha Sharma wrote, while the other half will come by the end of Microsoft’s 2027 fiscal year (which runs through June 30, 2027). CNBC cites “a person familiar with the matter” in reporting that these cuts amount to roughly 20 percent of the Xbox division.

When combined with 1,600 newly announced layoffs across the rest of Microsoft, the company as a whole is letting go of just over 2 percent of its workforce. But The Seattle Times reports that Microsoft’s total headcount has remained relatively stable thanks to other hiring.

The newest Xbox cuts follow a string of Microsoft gaming layoffs in recent years, including 1,900 jobs cut in the wake of the Activision Blizzard acquisition and 650 jobs cut later in 2024. In July of 2025, another round of layoffs led to the cancellation of a number of in-development gaming projects at Xbox such as Perfect Dark and Everwild. In today’s announcement, though, Sharma said that “none of our first party publicly announced games or projects are being cancelled as part of these reductions.”

Sharma characterized these Xbox staffing reductions as a way to “simplify” a division that has become bloated with complicating layers of middle management. Some decisions in the gaming division currently pass through “14 layers” of decision-makers, Sharma said, before promising that the new Xbox will be a “flatter organization” with “no more than 5, and where possible, 3” layers of management involved in any decision.

Today’s announced layoffs also seem focused on reining in a large Xbox platform team, which Sharma said has grown “40% larger than they were at the start of this generation, even as our player base and playtime have declined.” That could have an outsized impact on the development of Project Helix, the recently announced hybrid console that will also play generic PC games.

Hit the road, small studios

Amid these layoffs, Microsoft is also executing a massive reversal of its studio acquisition spree that dates back to 2018. Compulsion Games (We Happy Few) and Double Fine Productions (Psychonauts) will “return to management” and operate independently with full control of their intellectual property, Sharma writes. Ninja Theory (Hellblade: Senua’s Sacrifice) and Undead Labs (State of Decay), meanwhile, have been purchased by other unnamed companies, while France’s Arkane Studios (Dishonored, Prey) is reviewing “potential strategic options” to operate outside of Xbox.

Sharma bluntly admitted that these smaller studio acquisitions have been a financial mistake for Microsoft, resulting in a loss of “64 cents for every dollar we invested” in a “typical year.” In recent years, Sharma writes that Xbox has “learned that we are not the best home for every type of studio” and that “it is neither possible nor desirable to own every great independent studio.”

At the same time, some of the larger game studios Microsoft has acquired are still apparently considered very desirable parts of its portfolio. Mojang (Minecraft) and King (Candy Crush) will now report directly to Sharma, reflecting their outsize share of Microsoft’s monthly player base and the “critical geographic, demographic, and differentiation” they bring to the gaming division, Sharma writes. And across Activision, Blizzard, Bethesda, and Xbox Game Studios, Sharma writes that Microsoft will be “shifting investment to focus on higher priority projects.”

The shift in Microsoft’s gaming priorities from small indie acquisitions to massive conglomerates has been apparent in recent years, with Microsoft shutting down Arkane Austin (Redfall) and Tango Gameworks (Hi-Fi Rush) shortly after finalizing its $69 billion investment in Activision Blizzard King in 2023. But today’s round of studio divestments seems to put a hard stop on the era where Microsoft was willing to put money toward pulling interesting indie developers into the Xbox fold.

In this new era, Microsoft will be refocused on taking big swings with the “industry-defining franchises” that it said last month had suffered from a lack of adequate funding in recent years. That’s good news for fans of Call of Duty, Fallout, and Halo, but less good news for fans of the offbeat experiments that have until now filled out Xbox Game Pass subscriptions.

It’s a hard pivot that Sharma admits is necessary because of bad Xbox investments in recent years, including a focus on Game Pass subscriptions and multi-platform games that “have created meaningful value,” but “did not grow at the pace we expected.” Those relative failures led to an Xbox division that essentially threw good money after bad and “added more teams, more investment, and more time, hoping for a better outcome,” Sharma wrote.

At the same time, those moves weakened Microsoft’s core gaming business, Sharma writes, resulting in a division “operating at margins that are 3-10x lower than comparable platform and publishing businesses.” But the people responsible for those strategic failures are not the ones who will be bearing the brunt of the division-wide changes announced today.

“I know this is painful,” Sharma writes. “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.”