The biggest shakeup in Xbox history is expected to begin within days. Microsoft is preparing a sweeping round of layoffs across its gaming division, and up to five first-party studios could be closed, sold, or spun off as part of what new Xbox CEO Asha Sharma is calling a “reset.” The cuts are reportedly set to start July 6, just after the close of Microsoft’s fiscal year, and they threaten some of the most beloved creative teams in the industry.
The Memo That Started It All
On June 10, Sharma and Xbox chief content officer Matt Booty sent a memo to employees that was simultaneously posted to Xbox Wire. Roughly 100 days into her tenure after succeeding Phil Spencer, Sharma delivered a blunt assessment: heavy spending, thin profit margins, and declining revenue “cannot continue.”
The numbers behind that statement are stark. Excluding Activision Blizzard King, Microsoft has spent over $20 billion on content, platform, and hardware subsidies over the past five years while annual revenue declined by nearly half a billion dollars. Xbox is ending the fiscal year at about a 3 percent accountability margin, an internal metric Microsoft uses to measure profitability. Gaming revenue fell 7 percent to $5.3 billion in the most recent quarter, with hardware revenue down a brutal 33 percent.
The memo also revealed a hardware component crisis. Console storage prices were already double what Microsoft paid last fall when Sharma took over in February. They have doubled again since, and the company expects to be paying over five times the prices of two years ago by holiday 2027. Microsoft says it cannot build enough consoles to meet demand and needs a new business model and hardware partnerships, even as it remains committed to its next-generation Project Helix console planned for 2027.
Five Studios on the Chopping Block
Reporting from Bloomberg, The Verge, GamesBeat, Kotaku, and Windows Central has named five studios facing closure, sale, or spinoff:
- Compulsion Games (South of Midnight, We Happy Few): The first studio rumored to be shutting down. Kotaku reported on June 16 that the team was brought into a call by Microsoft management and informed of its potential closure.
- Double Fine (Psychonauts, Keeper, Kiln): Bloomberg reported the studio is in active negotiations with Xbox leadership. Insider reports claim Double Fine has a buyout clause similar to the one Toys for Bob used to exit Microsoft and go independent.
- Ninja Theory (Hellblade): The timing here stings the most. The studio announced its new game Senua at the Xbox Games Showcase during Summer Game Fest 2026, only for The Verge to report weeks later that its closure is happening, with staff hoping the studio finds a buyer. Unlike Compulsion and Double Fine, an independence deal reportedly is not on the table.
- Undead Labs (State of Decay): GamesBeat reported, and Windows Central corroborated, that Microsoft is actively seeking a buyer for the Seattle studio. If no buyer emerges, State of Decay 3 could be cancelled despite active public playtests and a 2027 release window.
- Arkane Lyon (Dishonored, Deathloop): The Verge reports Microsoft is considering closing or selling the studio. Marvel’s Blade, which slipped to late 2027 and reportedly ran over budget, is facing cancellation either way.
According to Bloomberg’s Jason Schreier, employees at several studios have been informed of the situation and given permission to seek new work, though the status of the studios remains in flux. Even a successful spinoff would likely involve significant layoffs.
Cancellations and a Leadership Exodus
The studio drama comes alongside a leadership shakeup. Xbox Game Studios head Craig Duncan is stepping down after taking the role in October 2024, with his teams, including Halo Studios, The Coalition, Playground Games, Rare, and Obsidian, temporarily reporting to Booty.
Two long-gestating projects have already been cancelled: ZeniMax Online Studios’ unnamed MMORPG, in development since 2018, and Rare’s Everwild. These join a growing graveyard. Microsoft previously shuttered Arkane Austin, Alpha Dog Games, Roundhouse Studios, and The Initiative, while Tango Gameworks survived its 2024 closure only because Korean publisher Krafton stepped in.
The Scale of the Cuts
Company-wide, Microsoft is expected to lay off up to 2.5 percent of its roughly 220,000 employees, potentially around 5,000 workers across Xbox, sales, and consulting. That is smaller than last year’s 15,000 cuts across two rounds, partly because about a third of eligible U.S. employees took Microsoft’s first-ever voluntary retirement buyout earlier this year.
The ripple effects started early. Assembly, Xbox’s main PR agency, laid off staff on the Xbox account at the end of June, though Schreier later clarified those cuts were part of an agency-wide reorganization rather than Microsoft ending contracts.
Workers Push Back
On July 2, the Communications Workers of America held a press conference with members of multiple Xbox unions. CWA District 9 vice president Frank Arce condemned the planned cuts, saying Microsoft workers “will not be treated as disposable.” Pointing to recent console price hikes, Arce added, “The money is there, leadership is simply choosing where it goes and who pays.”
Union members called for layoff protections for all workers, including advance notice, two years of recall rights, and hiring freezes. Bargaining progress has been uneven. The World of Warcraft union reported recent positive movement from management, while ZeniMax union members said Microsoft has sat on their layoff protection proposals for months without a response.
A Strategic About-Face
Beyond the cuts, the reset marks a philosophical reversal. At the Xbox Games Showcase, Sharma walked back the multiplatform strategy of the late Spencer era, announcing Gears of War: E-Day and Clockwork Revolution as Xbox console exclusives. Reports indicate Microsoft plans to concentrate resources on tentpole franchises like Halo, Fallout, Call of Duty, and The Elder Scrolls.
The context makes the moment even heavier. Game Pass reportedly lost millions of subscribers after the October 2025 price hike. Console prices just jumped again, with the Xbox Series S now at $500 and the Series X disc model at $800. Meanwhile, Microsoft is on pace to spend more than $100 billion on AI and cloud infrastructure this fiscal year, and its stock is down roughly 19 percent over the past month.
Microsoft has not officially confirmed any studio closures, sales, or game cancellations. But with the layoffs reportedly beginning July 6 and Sharma’s 100-day reset clock ticking toward mid-September, the answers are coming soon. For fans of Psychonauts, Hellblade, State of Decay, and Dishonored, the next few weeks will determine whether these studios survive, escape, or disappear.
Sources: GeekWire | Xbox Wire | Variety | Windows Central | VGC | Engadget | Game Informer | TweakTown | Kotaku | GeekWire
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