Xbox announces 20% layoffs affecting 3,200 people; Microsoft executives warn that further changes in other business units are on the way.

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Microsoft's gaming division is undergoing its largest strategic adjustment in recent years.

According to a Bloomberg report on July 6, Xbox, a Microsoft subsidiary, announced a strategic reorganization plan, proposing layoffs of about 3,200 employees, which accounts for 20% of its workforce, and simultaneously divesting five game development studios. This adjustment aims to cut costs and focus resources on core business. Xbox CEO Asha Sharma admitted: "Our business is currently unhealthy."

This adjustment is also an important part of Microsoft's overall cost reduction and efficiency improvement. In addition to Xbox, the sales department and others will also cut about 3,200 positions, with a combined total of 6,400 layoffs for the two departments, accounting for less than 3% of Microsoft's global workforce of 228,000 employees. Meanwhile, Microsoft executives have sent a clearer signal: as investments in AI continue to expand, more business units will face similar restructuring in the future.

Xbox's profitability lags far behind peers, layoffs and restructuring begin

Asha Sharma, who became Xbox CEO in February, inherited a business with slowing growth and pressured profits.

In Monday's letter to employees, she stated that Xbox's current profit margin is 3 to 10 times lower than its competitors, the company must realign resource allocation and focus funding on products with larger economies of scale, with the ultimate goal of increasing Xbox's daily active users to 1 billion.

Sharma previously revealed in an internal memo that Xbox's "accountability profit margin," used to measure profitability, has dropped to just 3%, with significant revenue declines. "This situation cannot continue."

Although Microsoft has ramped up its gaming business in recent years, including its $69 billion acquisition of Activision Blizzard in 2023, Xbox has still not built a stable capability for producing hit games, console hardware sales remain weak, and Game Pass subscription growth is slowing. According to Sharma's disclosed figures, for every $1 invested, Xbox loses 64 cents in a typical year.

The layoffs will be carried out in phases, with about 1,600 people leaving immediately this week, and the rest to be cut over the next 12 months, affecting almost all Xbox departments.

Five studios are divested, Xbox returns to core IP strategy

In addition to layoffs, Microsoft will also make significant adjustments to its game studio system.

Ninja Theory ("Hellblade") and Undead Labs ("State of Decay") will be sold, with buyers yet to be confirmed, but both will continue to cooperate on ongoing projects like "Senua" and "State of Decay 3."

Double Fine ("Psychonauts") and Compulsion Games ("South of Midnight") will return to their founding teams' control. Microsoft will provide financial support during the transition and retain their existing IP and game copyright assets.

Arkane Studios ("Blade") in Lyon, France will begin strategic evaluation, exploring sale or other divestment options. Due to French labor regulations, related procedures are expected to take significantly longer than other studios.

All five studios were acquired under former Xbox head Phil Spencer. At the time, Microsoft hoped to expand first-party content to drive Game Pass growth, but this strategy ultimately failed to achieve expectations.

Meanwhile, ZeniMax will also restructure internally, with future resources focused on core IPs such as "Fallout," "The Elder Scrolls," "Doom," "Quake," and "Wolfenstein."

AI capital expenditures continue to expand, Microsoft signals more departments will be adjusted

The wider context behind Xbox's restructuring is Microsoft's continued investment in AI.

As one of the world's largest software companies, Microsoft has continuously expanded its AI infrastructure investment in recent years, building large-scale data centers and increasing capital expenditure, which has prompted further cuts in non-core business costs. Last year, Microsoft undertook two rounds of layoffs, affecting about 15,000 positions.

Microsoft Chief Human Resources Officer Amy Coleman said in an internal memo that this round of adjustments is due to fundamental changes in product development and customer needs, and the current organizational adjustment is only the beginning. She said:

"We are still in the early stages of this transformation. There will be more changes to come; other business units also need to undergo similar adjustments."

Sharma emphasized that this restructuring will not cancel any publicly announced game projects. Microsoft will continue to increase support for flagship products like "Minecraft," while further flattening management layers and improving studio management efficiency. She stated that this adjustment does not mean Xbox is shrinking, but is intended to put the business back on a sustainable growth track. "These changes are for a bigger future for Xbox, not a smaller one."

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