A ‘painful’ reset for Xbox: 3,200 job cuts, studio spinoffs, and a vow to return to growth in 2027

Xbox CEO Asha Sharma laid out a wide-ranging plan to overhaul Microsoft’s gaming division Monday, calling it the most significant restructuring in Xbox history and disclosing that the business has been losing 64 cents on every dollar invested in its game studios.

As detailed in a memo to employees, the changes include roughly 3,200 job cuts through the fiscal year — about 20% of the Xbox workforce — the spinoff of four game studios, a new COO, and a plan to flatten management from as many as 14 layers to no more than five.

“We will return to growth in 2027,” Sharma wrote. “History is full of companies that mistake longevity for inevitability. We will not be one of them.” 

Sharma, a startup veteran and former Microsoft AI leader, was named Xbox CEO in February. 

“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.”

But she also reiterated what she said in a memo last month: Xbox’s business is not healthy, operating at margins 3-10x lower than industry peers after years of heavy spending that failed to produce the expected growth. 

About 1,600 of the Xbox job cuts take effect Monday as part of a broader round of 4,800 layoffs across Microsoft. The remaining Xbox reductions will come in the months ahead. Sharma acknowledged that a year-long restructuring “creates additional challenges” but said “it is not possible to make all the necessary changes in a single day.” 

Sharma said the cuts reach across Activision, Bethesda/ZeniMax, Blizzard, King, Mojang, and Xbox Game Studios, though no publicly announced games are being cancelled.

Several game studios will be spun out as standalone ventures, removing the costs from Microsoft’s books while giving the studios a chance to survive on their own.

• Compulsion Games (South of Midnight) and Double Fine Productions (Psychonauts) will return to their management teams as independent studios, keeping their intellectual property and current projects. 
• Ninja Theory (Hellblade) and Undead Labs (State of Decay) will shift to new owners with funding to complete their current games. 
• In France, Arkane (Dishonored, Deathloop) is beginning a legally required consultation with its employee works council to determine its future. 

Sharma will also take on direct oversight of game studios Mojang (Minecraft) and King (Candy Crush), Xbox’s two largest studios by monthly active players. 

In addition, she is establishing a new chief operating officer role with end-to-end financial responsibility across content, hardware, platform, and services. Helen Chiang, a nearly two-decade Xbox veteran who led Mojang and the Minecraft franchise, has been promoted to the role. Dave McCarthy, a 17-year Xbox veteran who helped build the platform, is retiring. 

Across the division, Sharma wrote in the memo, Xbox will cut vendor spending by 50% and reduce management layers from as many as 14 to no more than five.

The overhaul follows a 25-year period in which Microsoft largely subsidized Xbox as a strategic bet on the living room. Microsoft CEO Satya Nadella has said that era is over, noting that YouTube creators make more money from Xbox games than Microsoft does.