Xbox is going through the biggest shake-up in its 25-year history. On July 6, chief executive Asha Sharma told staff the company would cut around 3,200 jobs, roughly a fifth of its workforce, in what she described as a reset rather than a retreat from gaming.
About 1,600 roles ended immediately, with the remaining 1,600 to be phased out over Microsoft’s 2027 financial year. The move is part of a wider reduction of 4,800 jobs across Microsoft as a whole, though Xbox has taken a disproportionate hit, accounting for close to a third of the total.
Sharma did not soften the reasons behind the decision. “Our business today is not healthy,” she told employees, explaining that Xbox’s profit margins are running three to ten times lower than comparable gaming and publishing businesses.
She was equally candid about where money has gone to waste. Since 2018, Xbox has expanded aggressively into new studios, but not every purchase has paid off. Sharma revealed that on average, the company lost 64 cents for every dollar it ploughed into some of its acquired studios each year and conceded that Xbox is “not the best home for every type of studio”.
As a result, four studios are leaving Xbox for good. Compulsion Games, known for South of Midnight and We Happy Few, and Double Fine Productions, the San Francisco studio behind the Psychonauts series, will become independent and keep hold of their games and intellectual property. Two further studios are affected, including Arkane’s French arm, where formal talks with staff representatives are under way.
Despite the scale of the cuts, Sharma insisted that no previously announced first-party game is being cancelled. Instead, Xbox wants a flatter, leaner structure with a tighter slate of flagship franchises and heavier investment behind the titles that matter most.
The backdrop to all this is a punishing stretch for the console business. Despite spending tens of billions of dollars to expand Xbox, including its blockbuster acquisition of Activision Blizzard, Microsoft has struggled to narrow the gap with Sony’s PlayStation and Nintendo. The venture’s hardware revenue recently fell by a third year on year, and rising component costs have made the hardware side of the business harder to sustain. Sharma has pointed to a broader hardware crisis sweeping the games industry, arguing that a stronger Xbox would be far better placed to absorb the shock.
The company has increasingly shifted its strategy towards distributing its games across more platforms, instead of relying on console-exclusive titles to drive Xbox hardware sales.
“South of Midnight producer Compulsion Games and Psychonauts maker Double Fine Productions will become independent studios, while Ninja Theory and Undead Labs will be spun off to grow Senua and State of Decay 3,” Sharma said.
‘The management of Arkane Studios, which developed ‘Dishonoured’ and is currently working on a game based on Marvel Comics character Blade, has started consultations with its workers’ union in France to review options. A healthy Xbox could weather the shock of the hardware crisis,” she added further.
Sharma took over as Xbox chief executive in February 2026, succeeding the long-serving Phil Spencer. She has moved quickly since arriving, cutting the price of Game Pass Ultimate, scrapping the Copilot AI assistant on Xbox consoles, and reviving long-shelved franchises, with a new Gears of War prequel now in development.
Looking further ahead, she wants Xbox to eventually reach more than a billion players a day and has called for a return to what she calls the brand’s “renegade spirit”. Whether the reset works will take years to judge, but Sharma left little doubt about her intent. “We will not be one of them,” she said, referring to companies that assume past success guarantees future survival.
AI to blame?
Xbox’s organisational revamp also comes amid big tech’s historic AI outlays, which are set to top USD 700 billion in 2026. These spendings are also putting pressure on companies to show returns from the technology and offset the rising cost of rolling the technology out across their business verticals. Amazon and Meta Platforms have also laid off thousands of employees this year.
Chief People Officer Amy Coleman, however, told employees in a memo that “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.”
“That (targeted cuts) makes the announcement read more like portfolio reallocation and operating discipline than a fresh catalyst for the stock. In the near term, the market is likely to reward Microsoft less for headcount reductions and more for evidence that AI monetisation is scaling faster than AI-related costs,” said Parth Talsania, CEO of Equisights Research, while interacting with Reuters.
Xbox’s parent, Microsoft, itself has gone through a nearly 23% slump in its shares in the first six months of 2026, making it their worst first-half performance since 2022.
The software giant, earlier in 2026, offered voluntary buyouts to about 7% of its US workforce, or about 9,000 employees. While the tech giant is known for trimming jobs near the end of its fiscal year in June, before setting spending plans for the new financial year, this year’s cuts also coincide with booming AI demand that has powered growth at Microsoft’s Azure cloud-computing business. While the venture has been the exclusive seller of OpenAI’s models, the mounting cost of building data centres to run those services is also squeezing the group’s cash flows.
While the company, in April, had forecast quarterly Azure sales above Wall Street estimates, it also issued a USD 190 billion spending projection for 2026 that massively surpassed expectations.