Xbox cuts 3,200 jobs, divests five studios in major Microsoft overhaul

Microsoft's Xbox is cutting 3,200 jobs and divesting five studios as CEO Asha Sharma restructures the gaming business to cut costs and focus on bigger games.

Microsoft's Xbox is cutting 3,200 jobs, which is about 20% of Xbox's workforce, over the next year as part of a major restructuring to improve the gaming business. Xbox is also divesting five game development studios as part of the overhaul.

The company said the restructuring is meant to simplify the business, cut costs, and invest more money into bigger game projects. Xbox CEO Asha Sharma announced the changes in a note sent to employees on Monday morning. Sharma said Xbox's business is currently in a poor financial position. "Our business today is not healthy,"

Sharma wrote in the staff note. She also said Xbox is operating at profit margins that are three to ten times lower than similar businesses." We must reset Xbox," Sharma wrote. Xbox has spent heavily over the years, including buying Activision Blizzard for $69 billion in 2023, but the business has still struggled. Bloomberg reported that Xbox has faced fewer blockbuster game releases, falling hardware sales, and a difficult gaming market despite those investments.

Sharma had earlier told employees Xbox's accountability margin had fallen to 3%, and the company said the layoffs would happen over the next 12 months.

Studios being divested

Xbox will sell Ninja Theory, the studio behind Hellblade, to an undisclosed buyer. Xbox will also sell Undead Labs, known for State of Decay, to an undisclosed buyer. Even after the sale, both studios will continue developing their current games: Senua and State of Decay 3 with Xbox. Xbox will spin off Double Fine, the studio behind Psychonauts.

Xbox will also spin off Compulsion Games, the developer of South of Midnight. Bloomberg said these two studios will return to private ownership under their original founders. Sharma said Double Fine and Compulsion Games will receive funding during the transition and will keep full ownership of the intellectual property (IP) they have created, including their older games.

Xbox will also begin a consultation process with Arkane Studios in Lyon, France. Xbox will review possible strategic options for Arkane, including a sale or spin-off. Sharma said Xbox wants to "review potential strategic options" for Arkane. The Arkane process has not officially started yet and will take longer because of French labor laws.

Why Xbox is making these changes

All five studios were originally acquired under former Xbox CEO Phil Spencer. Spencer spent years buying both small game developers and major publishers, including Activision Blizzard and ZeniMax, according to Bloomberg. His strategy was to make Xbox Game Pass, Microsoft's video game subscription service, more attractive by adding more exclusive games.

The growth of Xbox Game Pass eventually slowed down, reducing the expected benefits of those acquisitions. Sharma acknowledged that the acquisitions had some success. "Created meaningful value" but "they did not grow at the pace we expected," Sharma wrote. She also said that "in a typical year" Xbox was losing 64 cents for every dollar it invested in the business.

"It is neither possible nor desirable to own every great independent studio," Sharma wrote. She added, "As we reset Xbox, we will help independent creators succeed by providing open development tools and audiences to realize their vision".

What stays the same

Sharma said no publicly announced game projects will be canceled because of the restructuring. However, she said job cuts will affect every part of Xbox, including studios that the company is keeping. Sharma said this is being done "to focus on higher priority projects".

Bloomberg reported that ZeniMax will be reorganized and will focus mainly on its biggest game franchises. Those franchises include Fallout, The Elder Scrolls, Doom, Quake, and Wolfenstein. Xbox will also reduce management layers in its platform division to speed up product development.

Xbox will introduce a more centralized studio structure. The company also plans to increase investment in major blockbuster games like Minecraft. Sharma said her long-term goal is for Xbox to reach one billion players every day. She told employees the restructuring is meant to build a stronger future for Xbox. "These changes are about a bigger future for Xbox, not a smaller one," Sharma wrote.

She added, "This year, we’ll invest as much in Xbox as we ever have, but we'll invest with greater focus, greater discipline, and greater clarity, all in service of making Xbox where the world plays and creates," according to Bloomberg.