Xbox Announces 20% Layoffs Affecting 3,200 Employees; Microsoft Executives Warn: More Business Unit Changes Are on the Way

Microsoft's gaming business is undergoing its largest strategic adjustment in recent years.

According to a Bloomberg report on July 6, Microsoft's Xbox announced the launch of a strategic restructuring, planning to lay off approximately 3,200 employees, accounting for 20% of its total workforce, while simultaneously divesting five game development studios. This adjustment aims to reduce costs and concentrate resources on core businesses. Xbox CEO Asha Sharma admitted, "Our business is currently not healthy."

This adjustment is also a significant part of Microsoft's overall cost-cutting and efficiency-enhancing initiatives. In addition to Xbox, approximately 3,200 positions will be eliminated in departments such as sales, bringing the combined layoffs in these two sectors to about 6,400, representing less than 3% of Microsoft's global workforce of 228,000 employees. Meanwhile, Microsoft's senior management has sent a clearer signal: As investments in the AI sector continue to expand, more business units will face similar restructurings in the future.

Xbox Profitability Lags Far Behind Peers, Launching Layoffs and Restructuring

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

In a letter to employees on Monday, she stated that Xbox's current profit margins are 3 to 10 times lower than those of its peers, and the company must readjust resource allocation to concentrate funding on products with greater scale effects, with the ultimate goal of driving Xbox's daily active player base to reach 1 billion.

Sharma had previously revealed in an internal memo that Xbox's internal "accountable margin" used to measure profitability had dropped to just 3%, with revenue also showing a significant decline. "This situation cannot continue."

Although Microsoft has continued to increase its investment in the gaming business in recent years, including the $69 billion acquisition of Activision Blizzard in 2023, Xbox has failed to establish a stable capability for producing hit games. Console hardware sales have remained weak, and the growth of Game Pass subscriptions has gradually slowed. According to data disclosed by Sharma, Xbox loses 64 cents for every dollar invested in a typical year.

The layoffs will be implemented in phases, with approximately 1,600 people leaving immediately this week, and the remaining positions to be eliminated sequentially over the next 12 months, affecting nearly all business units within Xbox.

Five Studios Divested as Xbox Returns to Core IP Strategy

In addition to layoffs, Microsoft will also make significant adjustments to its game studio system.

Ninja Theory (Hellblade) and Undead Labs (State of Decay) will be sold. Specific buyers have not yet been announced, but both parties will continue to cooperate to complete already initiated projects such as Senua and State of Decay 3.

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

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

All five of the above-mentioned studios were acquired during the tenure of former Xbox head Phil Spencer. At that time, Microsoft hoped to drive Game Pass subscription growth by continuously expanding its first-party content lineup, 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 Capital Expenditure Continues to Expand, Microsoft Previews Adjustments in More Departments

Behind the Xbox restructuring lies the broader context of Microsoft's continuous resource investment in AI.

As one of the world's largest software companies, Microsoft has continued to expand its AI infrastructure investment in recent years, building data centers on a large scale. With capital expenditures rising continuously, the company has been compelled to continuously compress costs in non-core businesses. Last year, Microsoft conducted two consecutive rounds of layoffs, cumulatively affecting approximately 15,000 positions.

Microsoft's Chief People Officer Amy Coleman stated in an internal memo that this round of adjustments stems from fundamental changes in product development methods and customer needs, and that the current organizational adjustments are only the beginning. She said:

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

Sharma emphasized that this restructuring will not cancel any previously announced game projects. Microsoft will continue to increase investment in flagship products such as Minecraft, while further compressing management layers to improve studio management efficiency. She stated that this adjustment does not mean Xbox is contracting, but rather aims to return the business to a track of sustainable growth. "These changes are for a bigger future for Xbox, not a smaller one."