Microsoft has announced the largest restructuring in Xbox’s 25 year history. It is cutting approximately 3,200 jobs throughout FY27. Roughly half of those layoffs are taking effect immediately. Additionally, the sweeping changes include four studios leaving Xbox ownership, management shakeups, and a dramatic overhaul of how the gaming division operates.

In a company-wide email sent to employees, Xbox boss Asha Sharma didn’t try to soften the reality of the situation. She called it “the most significant restructure in XBOX history” and admitted, “Our business today is not healthy.”

That level of honesty is rare from a company of Microsoft’s size. However, it paints a picture of a gaming division that has spent years chasing growth without seeing the returns it expected.

A Painful Reset

The restructuring follows another brutal round of Microsoft layoffs just one year ago. Roughly 9,000 employees across the company lost their jobs then. This time, the cuts are focused heavily on Xbox.

Sharma acknowledged the human cost of the decision, writing:

“These changes will directly affect people who have poured their creativity into building XBOX. Today’s decisions do not reflect their talent or dedication.”

The email repeatedly stresses that the layoffs are the result of business realities rather than employee performance.

Four Studios Leave Xbox

Perhaps the biggest surprise is Microsoft’s decision to let several of its first-party studios leave the Xbox umbrella altogether.

Compulsion Games, the developer behind South of Midnight, and Double Fine Productions, best known for Psychonauts, will return to independent ownership. Importantly, both studios will retain their intellectual property, back catalogs, and funding to complete their next projects.

Meanwhile, Ninja Theory and Undead Labs are expected to move to new owners. Their funding is in place to finish Senua and State of Decay 3. In France, Arkane has entered the legally required consultation process. This could ultimately lead to a sale or spin-off.

It’s an extraordinary reversal after years of Microsoft aggressively buying studios. Sharma admitted the strategy simply wasn’t sustainable.

“It is neither possible nor desirable to own every great independent studio.”

Xbox’s Strategy Didn’t Deliver

One of the most revealing sections of the email explains why Xbox has reached this point.

Microsoft says it entered the current console generation with a smaller player base and higher operating costs than its competitors. While investments in Game Pass, multiplatform releases, and studio acquisitions created value, they failed to grow quickly enough. This was not enough to offset declining performance elsewhere.

Sharma revealed a staggering statistic:

“In a typical year, we lost 64 cents for every dollar we invested.”

She also pointed to what she described as “the most severe hardware crisis in its history,”. This suggests declining console sales have fundamentally changed Xbox’s business model.

Slimming Down the Company

Beyond the layoffs, Microsoft is dramatically restructuring Xbox’s internal organization.

Some teams reportedly had as many as 14 layers of management. Going forward, Xbox plans to reduce that number to five, and ideally just three. Additionally, it intends to cut vendor spending by 50 percent.

According to Sharma:

“Great technology gets better when it gets simpler, not bigger.”

The company also plans to flatten management and simplify development tools. Moreover, it wants to place more responsibility directly on teams building games and services.

Games That Remain Safe

Despite the widespread cuts, Microsoft says none of its publicly announced first-party games have been canceled.

That means projects such as Fable, Gears of War: E Day, Clockwork Revolution, Call of Duty: Modern Warfare 4, Minecraft Dungeons 2, and The Elder Scrolls VI remain in development.

While that’s reassuring for players, it’s worth remembering that last year’s restructuring resulted in cancelled projects like Everwild. It also led to the closure of The Initiative. Development priorities can still change.

A New Direction for Xbox

The email also outlines a broader shift in leadership.

Helen Chiang has been promoted to the newly created role of Chief Operating Officer. She will oversee Xbox’s content, hardware, platform, and services under a single operating model. Mojang and King will now report directly to Sharma. This reflects Microsoft’s view that those businesses have evolved into massive gaming platforms in their own right.

Sharma insists the restructuring is about preparing Xbox for long term success rather than scaling back its ambitions.

“These changes are about a bigger future for XBOX, not a smaller one.”

She closed the email with an ambitious goal: turning Xbox into a company that entertains more than one billion people every day. Furthermore, she aims to return the business to growth in 2027.

What This Means For Gamers

Xbox has spent much of the last decade building one of the largest gaming portfolios in the industry through acquisitions, Game Pass, and aggressive investment. Nevertheless, this restructuring signals that Microsoft believes it’s time to stop expanding and start focusing on making the business profitable.

Whether that strategy pays off remains to be seen. Still, one thing is clear: Xbox is entering a very different chapter.

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