Microsoft announces 3,200 layoffs and divests five studios in Xbox reset

On Friday, Microsoft revealed a significant restructuring within its Xbox division, announcing plans for 3,200 layoffs and the divestment of five gaming studios. This drastic move is part of a broader strategy to address the challenges facing Microsoft's gaming segment, which executives characterized as requiring an "Xbox reset." The layoffs are set to take effect in two phases, with half implemented immediately and the remainder by the end of Microsoft's 2027 fiscal year.

Impact of Layoffs on Xbox Division

The layoffs will result in a reduction of roughly 20 percent of the Xbox workforce, according to CNBC. This follows a troubling trend in the company, with previous job cuts totaling 1,900 in the wake of the Activision Blizzard acquisition and an additional 650 in 2024. Despite these cuts, Microsoft's overall headcount has remained stable due to ongoing hiring in other areas.

New Xbox CEO Asha Sharma stated that these staffing reductions are intended to simplify the organization, which has become burdened by excessive layers of management. Currently, decisions within the gaming division can pass through as many as 14 layers of decision-makers. Sharma emphasized the need for a more streamlined approach, promising that future decisions would involve no more than 5 layers of management.

Divestment of Smaller Studios

Alongside layoffs, Microsoft is reversing its strategy of acquiring smaller game studios. Notably, Compulsion Games and Double Fine Productions will regain full control of their intellectual properties. Additionally, Ninja Theory and Undead Labs will be sold to other companies, while Arkane Studios is exploring strategic options outside of Xbox.

Sharma acknowledged that these acquisitions have been financially detrimental, citing losses of 64 cents for every dollar invested in a typical year. The shift reflects a realization that not all studios fit within Microsoft's vision for Xbox.

Focus on Major Franchises

As part of this restructuring, Microsoft is now prioritizing larger gaming franchises. Mojang and King will report directly to Sharma due to their significant player bases. The company plans to redirect investments towards major projects across its portfolio, including Activision, Blizzard, and Bethesda.

This pivot away from smaller indie developers signals a new era for Xbox, focusing on more established franchises like Call of Duty and Halo. Sharma admitted that previous investments in indie games and Game Pass subscriptions did not yield expected growth, leading to the current restructuring.