Microsoft dropped the hammer on Xbox today, and it is the biggest shakeup the brand has ever seen. In a memo to staff titled “Resetting Xbox,” CEO Asha Sharma announced that approximately 3,200 roles will be eliminated across the gaming division throughout fiscal year 2027, with roughly 1,600 of those cuts happening immediately. Sharma called it the most significant restructure in Xbox history and did not sugarcoat the reasoning, writing that the business “is not healthy” and operating at margins 3 to 10 times lower than comparable platform and publishing companies.
The layoffs are only part of the story. Four studios are leaving Xbox entirely. Compulsion Games, the team behind South of Midnight, and Double Fine Productions, the studio behind Psychonauts 2, will return to their management and transition back into independent studios. Both keep their IP, their catalogs, and runway funding for their next projects. Ninja Theory and Undead Labs have entered terms to join new ownership, with funding in place to complete and grow Senua and State of Decay 3. Microsoft has not disclosed who the buyers are. A fifth studio, Arkane in France, is beginning a legally required consultation with its Works Council to review strategic options, leaving the fate of Marvel’s Blade uncertain.
Cuts are also hitting Activision, Bethesda and ZeniMax, Blizzard, King, Mojang, and Xbox Game Studios, though Microsoft says none of its publicly announced first party games or projects are being cancelled. Mojang and King will now report directly to Sharma, a sign of how central Minecraft and Candy Crush have become to the company’s plans. Sharma also promoted longtime Xbox veteran Helen Chiang to a newly created Chief Operating Officer role with full profit and loss responsibility across content, hardware, platform, and services. Dave McCarthy is retiring after 17 years.
The memo lays out a sweeping internal overhaul as well. Sharma revealed that work in some parts of the company passes through as many as 14 layers of management, which she plans to flatten to no more than 5, and ideally 3. Platform teams grew 40 percent larger than they were at the start of this console generation even as the player base and playtime declined, and Sharma admitted the studio buying spree since 2018 did not pay off, with Xbox losing 64 cents for every dollar it invested in a typical year.
The timing stings. This comes almost exactly one year after Microsoft’s July 2025 layoffs that hit 9,000 employees company wide, cancelled Rare’s Everwild, and shut down Perfect Dark developer The Initiative. Reports from Bloomberg peg today’s cuts at around 20 percent of Xbox staff, and The Verge reports Microsoft is cutting 4,800 jobs total across all divisions.
Sharma insists this is about a bigger future for Xbox, not a smaller one, promising a return to growth in 2027 and a goal of entertaining more than a billion people a day. For the thousands of developers packing up their desks today, and for fans watching beloved studios like Double Fine walk out the door, that promise is going to be a hard sell.
Sources: Variety, Kotaku, Bloomberg, Windows Central
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