Microsoft’s gaming division is undergoing its most significant restructuring since the Xbox brand was established. Xbox CEO Asha Sharma announced in an internal memo on July 6 that approximately 3,200 positions will be eliminated before the end of fiscal year 2027, with 1,600 of those taking effect immediately that day. Simultaneously, four studios will exit the Xbox ecosystem, while a fifth studio, Arkane, is currently evaluating “potential strategic options.”
Xbox Begins Most Brutal Restructuring in History: 3,200 Layoffs, Four Studios Sold
This is also the fourth round of major layoffs the gaming division has experienced since Microsoft acquired Activision Blizzard for $69 billion (approximately NT$2.2 trillion) in 2023. In the letter, Sharma directly admitted:Our current business is not in good shape. Our profit margins are only one-tenth to one-third those of similar platforms and publishing companies.This statement was interpreted by outsiders as Microsoft publicly acknowledging for the first time that Xbox’s long-standing Game Pass and multi-platform expansion strategy failed to achieve the expected results.
Four Studios Leave Xbox
The most notable move in this restructuring is four studios leaving Microsoft:
- Double Fine ProductionsThe developer of Psychonauts has regained its independence with founder Tim Schafer, retaining all IP and its catalog, with Microsoft providing funding and support during the transition period.
- Compulsion Games(South of Midnight developer): Also returns to independence, with founder Guillaume Provost taking over and retaining all IP.
- Ninja Theory(Developer of Hellblade II): Signs transfer agreement with undisclosed new buyer. Team will complete Senua’s Saga: Hellblade III, expected 2027 release.
- Undead Labs(The State of Decay developer): Likewise transferred to the new buyer, will continue developing State of Decay 3.
Additionally, France’s Arkane Studios (developer of Dishonored) is currently negotiating with the French Works Council to evaluate “potential strategic options.” The project Arkane is currently developing has been delayed and is over budget.
We lost 64 cents for every dollar invested
In an internal letter, Sharma reviewed Xbox’s strategic missteps in recent years. She pointed out that when Xbox entered the ninth generation (Xbox Series X/S), it had a smaller install base and a higher cost structure. In pursuit of growth, Xbox bet on Game Pass, a multi-platform strategy, and a larger content lineup, but “Game Pass and multi-platform strategy created real value, just not at the pace we expected.”
The more critical figure is this: Sharma says Xbox loses 64 cents for every dollar invested in a typical year. At the same time, the gaming industry is facing “the worst hardware crisis in history,” with persistent memory shortages and sharply deteriorating hardware costs ahead of new console launches making Xbox’s situation even worse. Former Xbox head Phil Spencer and President Sarah Bond have suddenly left, with Sharma stepping in from Microsoft’s CoreAI product division. Her predecessors left behind a legacy of aggressive acquisitions and multiple rounds of restructuring, with brand positioning constantly wavering, ultimately culminating in this “reset.”
25+ Studio’s List of Fates
A review of all Xbox studios shows that the core studios remaining within the Xbox ecosystem include:
- Halo Studios(Formerly 343 Industries): Completing “Halo: Campaign Evolved,” expected to launch in July
- The Coalition“Gears of War: E-Day” will be released in October
- Playground GamesForza Horizon 5 is receiving high praise, with the Fable reboot set to launch in February 2027.
- Obsidian EntertainmentContinuing to support Avowed, future plans undisclosed (layoffs ~25%)
- Bethesda Game StudiosContinuing development of Elder Scrolls 6
- id Software“Doom: The Dark Ages” major expansion releasing in July
- MachineGamesAccording to reports, a third Wolfenstein reboot is in development
- Mojang and KingChanged to report directly to Sharma, highlighting its position as the studio with the most monthly active players.
Toys for Bob, which departed from Xbox in 2024, was an earlier case of a successful split and is currently collaborating with Xbox on developing a new game. As for the teams under Activision, nearly all of them are dedicated to developing and supporting the Call of Duty franchise, including Infinity Ward, Treyarch, Sledgehammer Games, Raven Software, and eight other teams. The sheer scale of this development workforce exists because the Call of Duty series continues to release new entries annually, in addition to seasonal updates for multiple existing games and the mobile version, all of which require substantial manpower to maintain operations.
Another regrettable case is The Initiative, an AAA studio Xbox founded in 2018 aimed at rebooting the Perfect Dark franchise. Though the first footage released in 2024 received enthusiastic responses, Xbox still shut down the studio and cancelled the project in 2025. Zenimax Online, the developer of Elder Scrolls Online, was also hit hard by this wave of layoffs, reportedly losing nearly half its workforce.
Organizational flattening: cutting management levels from 14 to no more than 5
In addition to studio adjustments, Sharma also announced major organizational reforms. She pointed out that some Xbox teams have up to 14 layers of management, the platform team has grown by 40% since the start of this generation, yet player numbers and playtime are declining.
Reform measures include: reducing management levels to a maximum of five (targeting three); establishing the first-ever Chief Operating Officer (COO) position, held by Helen Chiang, responsible for end-to-end P&L of content, hardware, platform and services; and cutting external vendor spending by half.
We don’t take longevity for granted.
Sharma wrote at the end of the internal letter: “History is full of companies that mistook longevity for inevitability. We will not be one of them.” She said Xbox will return to growth in 2027, and this year’s investment in Xbox will be on par with previous years, but will be deployed with greater focus and discipline.
From a frenzied acquisition spree in 2018 to mass sell-offs in 2026, Xbox completed a full expansion and contraction cycle in eight years. During Spencer’s tenure, Microsoft pursued aggressive acquisitions of Bethesda and Activision Blizzard, attempting to leverage the scale of its content library to support the growth of the Game Pass subscription model, but ultimately proved that owning more studios doesn’t equal a better business model. When profit margins are only one-tenth of competitors’ and losing 64 cents on every dollar invested, even the most extensive studio roster can’t sustain an unsustainable business model. For the gaming industry, this restructuring sends a clear signal: throwing money at acquisitions and expanding subscription models cannot guarantee long-term competitiveness in the gaming market. Xbox’s experience may serve as a cautionary tale for other major publishers considering M&A and subscription strategies.
Data source
Source: KOCPC Chinese