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In July 2026, Microsoft announced a major restructuring of its Xbox division, characterized by a 20% reduction in its total gaming workforce and the divestment of five development studios. The initiative, described by Xbox CEO Asha Sharma as the most significant reorganization in the company’s history, involves the immediate layoff of 1,600 employees, with an additional 1,600 cuts scheduled throughout the fiscal year ending June 30, 2027. This downsizing also includes a substantial reduction of the platform team, where management layers are being compressed from 14 to five to address perceived organizational bloat.

The divestment strategy marks a sharp reversal of the aggressive acquisition spree initiated in 2018. Five studios—Double Fine, Compulsion Games, Undead Labs, Ninja Theory, and Arkane Lyon—are being spun off or sold to new owners. While these studios are not being shuttered, the move signals a pivot away from the previous strategy of maintaining a broad portfolio of mid-sized teams to support the Game Pass service. Instead, leadership intends to refocus resources on core, high-performing franchises such as Halo and Fallout, while centralizing oversight of major assets like Minecraft and Candy Crush under the CEO.

The rationale for these cuts centers on a business environment defined by rising hardware costs and growth targets that failed to materialize as expected. Leadership noted that the division’s previous strategy of expanding content and investment did not yield sustainable returns, citing a loss of 64 cents for every dollar invested in smaller studios over the past decade. Despite these contractions, Microsoft maintains that it will continue to operate the Game Pass service and proceed with the development of the upcoming Project Helix console, aiming to stabilize the business by prioritizing core profitability over the previous model of expansive, independent-style content acquisition.