Microsoft's gaming business is undergoing its most significant strategic realignment in recent years.
On July 6th, it was reported that Microsoft's Xbox division announced a strategic reorganization, planning to lay off approximately 3,200 employees, representing 20% of its workforce, while simultaneously divesting five game development studios. This move is aimed at reducing costs and concentrating resources on core operations. Xbox CEO Asha Sharma acknowledged, "Our business is not healthy right now."
This adjustment is a key part of Microsoft's broader initiative to reduce costs and improve efficiency. Beyond Xbox, departments such as sales will also eliminate around 3,200 positions. Combined, the two divisions will cut roughly 6,400 jobs, which is less than 3% of Microsoft's global workforce of 228,000. Concurrently, senior leadership has signaled more definitively that as investments in the AI field continue to expand, additional business units will face similar reorganizations in the future.
Xbox Profitability Lags Peers, Prompting Layoffs and Restructuring
Asha Sharma, who assumed the role of Xbox CEO in February of this year, inherited a business experiencing 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 its peers. The company must reallocate resources to concentrate funding on products with greater scale, with the ultimate goal of driving Xbox's daily active player base to 1 billion.
Sharma had previously revealed in an internal memo that Xbox's internal "accountability margin," a metric used to gauge profitability, had fallen to just 3%, and revenue had also seen a significant decline. "We cannot continue like this."
Despite Microsoft's continued investment in its gaming business in recent years, including the $69 billion acquisition of Activision Blizzard in 2023, Xbox has consistently failed to establish a stable pipeline of hit games. Console hardware sales remain weak, and Game Pass subscription growth has gradually slowed. According to data disclosed by Sharma, for every dollar Xbox spends in a typical year, it loses 64 cents.
The layoffs will be implemented in phases, with about 1,600 people departing immediately this week. The remaining positions will be eliminated over the next 12 months, affecting nearly all of Xbox's business units.
Five Studios Divested as Xbox Refocuses on Core IP Strategy
In addition to the workforce reductions, Microsoft will also make significant adjustments to its game studio system.
Among the changes, Ninja Theory (developer of *Hellblade*) and Undead Labs (developer of *State of Decay*) will be sold. The specific buyers have not been announced, but both parties will continue to collaborate to complete already-initiated projects like *Senua* and *State of Decay 3*.
Double Fine (developer of *Psychonauts*) and Compulsion Games (developer of *South of Midnight*) will return to the control of their founding teams. Microsoft will provide transitional funding and will retain the existing intellectual property and game copyright assets of both companies.
Arkane Studios in Lyon, France (developer of *Blade*), will undergo a strategic review to explore a sale or other divestment options. Due to French labor regulations, the related process is expected to take significantly longer than for the other studios.
All five studios were acquired during the tenure of former Xbox head Phil Spencer. At the time, Microsoft hoped that continuously expanding its first-party content lineup would drive Game Pass subscription growth, but this strategy ultimately failed to meet expectations.
Simultaneously, ZeniMax will undergo an internal reorganization, with future resources concentrated on core intellectual properties such as *Fallout*, *The Elder Scrolls*, *Doom*, *Quake*, and *Wolfenstein*.
AI Capital Expenditure Continues to Grow, Microsoft Hints at More Departmental Adjustments
Behind the Xbox restructuring lies the broader context of Microsoft's ongoing resource allocation towards AI.
As one of the world's largest software companies, Microsoft has been steadily increasing its investment in AI infrastructure in recent years, building data centers on a large scale. This rising capital expenditure has also prompted the company to continuously reduce costs in non-core businesses. Last year, Microsoft conducted two rounds of layoffs, cumulatively affecting approximately 15,000 positions.
Microsoft 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 changes are just the beginning. She noted:
"We are still in the early stages of this transformation. There will be more changes in the future, and other business units within the company will also need to undergo similar adjustments."
Sharma emphasized that this restructuring will not cancel any publicly announced game projects. Microsoft will continue to invest in flagship products like *Minecraft*, while further streamlining management layers and improving studio management efficiency. She stated that these changes do not signify a contraction for Xbox but are intended to put the business back on a path of sustainable growth. "These changes are for a bigger future for Xbox, not a smaller one."
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