Half of the job cuts are taking place immediately while four studios are moving to new ownership.

As expected, Microsoft is gutting its Xbox teams once again. It had been widely reported that the company would let a large number of staff go following the end of its fiscal year on June 30 as it seeks higher profit margins and greater efficiency in its gaming unit. In a memo to staff that was shared publicly, Xbox CEO Asha Sharma confirmed that the division plans to let around 3,200 employees go over the next year across Activision, Bethesda/ZeniMax, Blizzard, King, Mojang and Xbox Game Studios, with 1,600 job cuts taking place immediately.

Xbox has announced that four of its studios will continue under new owners. South of Midnight developer Compulsion Games and Double Fine Productions will go independent "with their IP, catalog, and runway for their next games," Sharma said. Ninja Theory and Undead Labs will "have entered terms to join new ownership with funding to complete and grow Senua and State of Decay 3." As for Arkane Studios, which was also rumored to be on the chopping block, Sharma says that developer's "management is beginning required consultation with its Works Council to review potential strategic options."

These changes are part of a reset of Xbox's content portfolio, Sharma said. "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," she wrote." 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."

Sharma noted that while Xbox isn't canceling any first-party games or projects it has publicly announced, the division is shifting some investments "to focus on higher priority projects." Mojang and King will now report directly to Sharma, who is flattening the organization by removing some layers of management in the name of efficiency. "Our platform teams are 40 percent larger than they were at the start of this generation, even as our player base and playtime have declined," she wrote. "That complexity has slowed decisions, blurred accountability, and made it harder to deliver for players."

As part of the changes, Dave McCarthy, the division's chief operating officer, is retiring from Xbox. It's installing Helen Chiang, who has been part of Minecraft's leadership team for the last decade, as its new COO. Chiang "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," Sharma wrote. The new COO will have "end-to-end [profit and loss] responsibility across content, hardware, platform, and services."

Sharma was fairly blunt about the reasons behind the restructuring. "Our business today is not healthy. We are operating at margins that are 3-10x lower than comparable platform and publishing businesses," she wrote. "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."

The division set the stage for the layoffs several weeks ago. Its leaders shared a memo in which they laid out plans for a "reset" of the division, suggesting that the current revenue margins were unsustainable. The head of Xbox Game Studios stepped down soon after the memo was made public, while several studios were reported to be on the chopping block.

It was initially said that the heads of Ninja Theory, Double Fine and Compulsion Games were negotiating with Xbox in an attempt to take their studios independent again or find new ownership. Otherwise, they were expected to be shut down. Undead Labs and Arkane were later reported to be at risk of closure or divestment.

Ahead of the job cuts, The Communications Workers of America, a union that represents many game industry workers at Microsoft, urged the company to negotiate in good faith over "meaningful layoff protections."

Microsoft enacted these sweeping layoffs shortly after announcing it would increase the prices of Xbox consoles, owing to skyrocketing memory and storage costs — something the company also played a part in as it builds out its AI compute capacity. Xbox previously cut 1,600 jobs in early 2024 and hundreds more just over a year ago.