Xbox Loses 20% of Workforce as Microsoft Resets Gaming

Microsoft said Monday it will cut 20% of its Xbox workforce, eliminating 1,600 positions immediately with 1,250 more to follow by the end of the year. The layoffs are part of a broader plan to shed 4,800 jobs across the company, roughly 2% of total headcount. The total reduction from the Xbox division is about 2,850 employees.

Xbox chief Asha Sharma told employees in a letter that platform teams had grown 40% since the start of the current console generation even as player numbers and playtime declined. “As we reset Xbox, we will simplify,” she wrote. Sharma succeeded longtime Xbox head Phil Spencer in February and is now putting her stamp on the division.

The video game industry was a strong point for Microsoft during the pandemic. As the current console generation began, the company added several AAA and indie game studios to its portfolio, betting on exclusive content to drive Xbox sales and Game Pass subscriptions. Now several of those studios are being cut loose.

Compulsion Games and Double Fine Productions will spin off into independent studios. Ninja Theory and Undead Labs have entered terms to join new ownership, Sharma said. Arkane Studios, known for titles like Dishonored and Deathloop, was purchased as part of Microsoft’s $8.1 billion acquisition of ZeniMax Media in 2021. The $8.1 billion deal also brought Bethesda Softworks and id Software under Microsoft. Arkane’s future remains under review while those other studios continue as part of Xbox.

The layoffs come as Xbox contends with Sony’s PlayStation 5 and the Nintendo Switch. Executives said they misjudged how quickly the gaming market would normalize once lockdowns ended. Player numbers and playtime have declined while the platform team grew 40%. The 40% growth in platform teams relative to a shrinking player base means the division's costs rose faster than its revenue base could support.

The spin-offs relieve Microsoft of payroll and operational costs for those studios. Future game releases from Compulsion or Double Fine will not be Xbox exclusives by default. The newly independent studios will need to find new publishing partners for future titles. Sharma did not disclose whether Xbox would continue to publish their games. The spin-offs are effective immediately, Sharma said. Compulsion and Double Fine will operate as independent entities. The company did not detail whether it will retain licensing ties.

For the gaming sector, the moves are part of a broader pullback. Publishers that hired heavily during the pandemic are now trimming. Microsoft’s decision to spin off rather than close studios means it retains ties to their work without carrying their full operational costs. The reduction in headcount will require the remaining teams to adjust to new priorities. Microsoft did not detail how the downsizing will affect its game release schedule.

Microsoft shares fell 1.2% to $385.79 on Monday. The company’s Alpha Score of 56/100 (Moderate) reflects the mixed outlook from the Xbox cuts and broader cost pressures. The restructuring extends a wave of cost discipline that had already hit the company earlier this year. Microsoft Cuts 4,800 Jobs as AI Costs Squeeze Margins covered the earlier round. The company is redirecting resources toward artificial intelligence, a higher-growth area that has required large capital investments.

Arkane’s fate remains unclear, Sharma said.