Xbox announces 20% layoffs affecting 3,200 people, Microsoft executives warn: More changes across business units are on the way.

Microsoft’s gaming business is undergoing the largest strategic adjustment in recent years.

According to a July 6 report by Bloomberg, Xbox, a subsidiary of Microsoft, has announced the launch of a strategic reorganization, planning to lay off approximately 3,200 employees—about 20% of its total workforce—and simultaneously divest five game development studios. This adjustment is intended to cut costs and concentrate resources on core business activities. Xbox CEO Asha Sharma said candidly, “Our business is not healthy right now.”

This move is also an important part of Microsoft’s broader effort to cut costs and improve efficiency. In addition to Xbox, departments such as sales will also eliminate approximately 3,200 positions, bringing the total layoffs across the two departments to about 6,400, accounting for less than 3% of Microsoft’s global workforce of 228,000 employees. At the same time, Microsoft’s senior leadership has sent a clearer signal: As investment in the AI sector continues to expand, more business units will face similar reorganizations in the future.

Xbox’s profitability lags far behind peers; layoffs and restructuring begin

Asha Sharma, who took office as Xbox CEO in February this year, has inherited a business with slowing growth and mounting pressure on profitability.

In a weekly letter to employees, she said Xbox’s current profit margin is 3 to 10 times lower than its peers, and the company must readjust its resource allocation—concentrating funding into products with stronger economies of scale. The ultimate goal is to bring Xbox’s daily active player base to 1 billion.

Sharma previously disclosed in an internal memo that Xbox’s “accountability profit margin,” which is used to measure profitability internally, has dropped to just 3%, and revenue has also fallen significantly. “This situation can’t continue.”

Despite Microsoft’s continued push to invest in gaming in recent years—including its $69 billion acquisition of Activision Blizzard in 2023—Xbox has consistently failed to build a stable capability to produce breakout hit titles. Console hardware sales have remained sluggish, and growth in Game Pass subscriptions has gradually slowed. Based on the data disclosed by Sharma, in a typical year Xbox loses 64 cents for every $1 it spends.

These layoffs will be carried out in phases: about 1,600 people will leave immediately this week, while the remaining positions will be eliminated gradually over the next 12 months, affecting nearly all business departments at Xbox.

Five studios are divested; Xbox returns to a core IP strategy

In addition to the layoffs, Microsoft will make major adjustments to its game studio system.

Among them, Ninja Theory (Hellblade) and Undead Labs (State of Decay) will be sold. The specific buyers have not yet been announced, but both sides will continue to collaborate to complete already initiated projects such as Senua and State of Decay 3.

Double Fine (Psychonauts) and Compulsion Games (South of Midnight) will instead return to the control of their founding teams. Microsoft will provide transitional funding support and will retain both companies’ existing intellectual property and game copyright assets.

Arkane Studios (Blade), located in Lyon, France, will initiate a strategic assessment to study sale or other divestiture options. Due to French labor regulations, the relevant procedures are expected to take noticeably longer than those for other studios.

All five of the studios above were acquired during the tenure of former Xbox head Phil Spencer. At the time, Microsoft hoped to drive growth in Game Pass subscriptions by continuously expanding the lineup of first-party content, but this strategy ultimately failed to meet expectations.

Meanwhile, ZeniMax will also undergo internal restructuring, with future resources concentrated on core IPs such as Fallout, The Elder Scrolls, Doom, Quake, and Wolfenstein.

AI investment continues to expand; Microsoft hints that more departments will be adjusted

Behind the Xbox restructuring is the broader context of Microsoft continuing to invest resources in AI.

As one of the world’s largest software companies, Microsoft has in recent years continued to expand its investment in AI infrastructure, building large-scale data centers, with capital expenditures climbing continuously. This has also prompted the company to keep compressing costs in non-core businesses. Last year, Microsoft carried out two consecutive rounds of layoffs, cumulatively affecting approximately 15,000 positions.

Amy Coleman, Microsoft’s Chief People Officer, said in an internal memo that this round of adjustments is driven by fundamental changes in product development approaches and customer needs, and that the current organizational restructuring is only the beginning. She said:

“We are still in the early stages of this transformation, and there will be more changes ahead. Other business units within the company will also need to undergo similar adjustments.”

Sharma emphasized that this restructuring will not cancel any game projects that have already been publicly announced. Microsoft will continue to ramp up investment in flagship products such as Minecraft, while further flattening management layers to improve studio management efficiency. She said this adjustment does not mean Xbox is shrinking; rather, it is intended to put the business back on a sustainable growth track. “These changes are for a bigger future for Xbox, not a smaller one.”

Risk warning and disclaimer

        Market risk exists; investment should be made with caution. This article does not constitute personal investment advice, nor does it consider the special investment objectives, financial conditions, or needs of any individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. You are responsible for all risks arising from any investment made based on this.