Microsoft is reducing its workforce by 4,800 positions today, with more than 30 percent of these cuts occurring inside the Xbox division. The broad gaming reductions will touch nearly every segment of Xbox operations and include spinning off four game studios to operate independently from Microsoft.

The layoffs today, framed as an Xbox reset, will affect around 1,600 Xbox staff according to an internal memo from Xbox CEO Asha Sharma. Reductions will continue beyond today, with Microsoft targeting elimination of roughly 20 percent of Xbox roles by the end of the financial year in July 2027.

Double Fine and Compulsion Games are returning to their founders, enabling Tim Schafer to guide Double Fine back to independence while Guillaume Provost establishes Compulsion Games as an indie studio once more. Ninja Theory, developer of Hellblade, and Undead Labs, creator of State of Decay, are also being sold under terms that secure continued work on Senua and State of Decay 3.

Sharma notes the difficulty of extended restructuring, stating that a year-long process brings added challenges and that it is not feasible to complete every adjustment in one day. She emphasizes that the decisions affect talented individuals who have contributed creativity to Xbox, many of whom joined through acquisitions or were drawn by passion for the platform.

Microsoft is also evaluating the sale or closure of another studio. Arkane Studios continues work on Blade, yet the project has encountered delays and budget issues. In France, Arkane management has started required consultations with its Works Council to examine strategic options, which may extend for months.

Additional Xbox studios face layoffs, with deeper cuts reported at Bethesda studios. Mojang and King will now report directly to Sharma. Changes span Activision, Bethesda/ZeniMax, Blizzard, King, Mojang, and Xbox Game Studios, yet no publicly announced first-party games or projects are being canceled.

The reductions target reversal of smaller studio acquisitions pursued by former Xbox leader Phil Spencer. Emphasis is moving toward larger franchises rather than competing directly with independent titles such as South of Midnight, Kiln, and Keeper.

Sharma explains that Microsoft now competes with both major publishers and smaller independent studios. Ownership of every strong indie studio is neither possible nor desirable, and the company has learned it is not the ideal home for every studio type, having lost 64 cents on every dollar invested in a typical year. Going forward, Xbox will support independent creators through open development tools and access to audiences.

Here is Sharma full memo:

Team,
We are beginning the most significant restructure in XBOX history. After careful consideration, I have made the difficult decision to reduce our team by approximately 3,200 throughout FY27. This will include approximately 1,600 role eliminations today, and in addition, four studios will leave XBOX to new management. I recognize that a year-long restructuring creates additional challenges. Unfortunately, it is not possible to make all the necessary changes in a single day, and I wanted to be direct about the scale.
I know this is painful. These changes will directly affect people who have poured their creativity into building XBOX. Many joined us through acquisitions, while others were recruited here, or sought us out because they loved this industry and loved XBOX. Today decisions do not reflect their talent or dedication.
Our business today is not healthy. We are operating at margins that are 3-10x lower than comparable platform and publishing businesses. We entered Gen 9 with a smaller install base and a higher cost structure. To grow, we bet on Game Pass, multi-platform, and a broader portfolio of content. While those businesses have created meaningful value, they did not grow at the pace we expected. As that happened, our core business weakened, and we added more teams, more investment, and more time, hoping for a better outcome. And now the industry is facing the most severe hardware crisis in its history. We must reset XBOX.
First, we will reset our content portfolio.
Since 2018, we have aggressively expanded our studio portfolio while the number of games created each month across the industry now outpaces the last ten years combined. We now find ourselves competing not only with the largest publishers, but also with smaller independent studios. It is neither possible nor desirable to own every great independent studio. We have also learned that we are not the best home for every type of studio; in a typical year, we lost 64 cents for every dollar we invested. As we reset XBOX, we will help independent creators succeed by providing open development tools and audiences to realize their vision.
Compulsion Games and Double Fine Productions will return to management and transition to independent studios with their IP, catalog, and runway for their next games. Ninja Theory and Undead Labs have entered terms to join new ownership with funding to complete and grow Senua and State of Decay 3. In France, Arkane management is beginning required consultation with its Works Council to review potential strategic options.
We are also making reductions across other units, and in some cases, shifting investment to focus on higher priority projects. These changes vary in size across Activision, Bethesda/ZeniMax, Blizzard, King, Mojang, and XBOX Game Studios. None of our first party publicly announced games or projects are being cancelled as part of these reductions.
In addition, Mojang and King will now report directly to me. These two studios have increasingly become platforms and are our largest by monthly active players. They bring critical geographic, demographic, and differentiation to XBOX.
Second, we will reset our platform.
We know that great technology gets better when it gets simpler, not bigger. Today, in some parts of the company, work passes through as many as 14 layers of management. Our platform teams are 40% larger than they were at the start of this generation, even as our player base and playtime have declined. That complexity has slowed decisions, blurred accountability, and made it harder to deliver for players. As we reset XBOX, we will simplify.
We will reduce management layers to no more than 5, and where possible, 3. We will deliver success through a flatter organization that is built around makers (individual contributors focused on building), player-coaches (leaders who remain deeply involved in the work while developing their teams), and directly responsible individuals (DRIs) who own key decisions and outcomes. And we will streamline how we work across our tools, with a cleaner code base, shared services, and 50% reduced vendor spend.
Third, we are resetting how we operate.
As XBOX grew our headcount, we became more fragmented. Teams, studios, and functions often operate independently, and it became harder to work towards a shared goal, make the right tradeoffs, and get things done.
For the first time, we are establishing a Chief Operating Officer with end-to-end P&L responsibility across content, hardware, platform, and services. Helen Chiang has been promoted to this role and will report directly to me. Over nearly two decades at XBOX, Helen has helped build some of our most important businesses, from XBOX Live to leading Mojang and the Minecraft franchise. She will bring our businesses together under one operating model, making sure we make clear investment decisions, learn from our successes and failures, and hold ourselves accountable for results.
Thank you, Dave McCarthy, who is retiring after 17 years with XBOX. Dave has played a defining role in building the platform that millions of players rely on every day and has been a trusted partner through many of the biggest moments in XBOX history. We wish him all the best.
These changes are about a bigger future for XBOX, not a smaller one. The next decade of gaming will be larger, more global, and more creative than anything we have seen before. This year, we will invest as much in XBOX as we ever have, but we will invest with greater focus, greater discipline, and greater clarity, all in service of making XBOX where the world plays and creates.
I want XBOX to be one of the few companies that entertains more than a billion people each day and gives everyone the opportunity to create and connect. I know we can achieve this goal. XBOX has many of the most beloved franchises in entertainment history, talented studios around the world, and we will return to growth in 2027.
History is full of companies that mistake longevity for inevitability. We will not be one of them.
Asha

Update, July 6th: Article updated to clarify Xbox layoff percentages for the fiscal year.