Xbox CEO Asha Sharma laid out a wide-ranging plan to overhaul Microsoft’s gaming division Monday, calling it the most significant restructuring in Xbox history and disclosing that the business has been losing 64 cents on every dollar invested in its game studios.

As detailed in a memo to employees, the changes include roughly 3,200 job cuts through the fiscal year — about 20% of the Xbox workforce — the spinoff of four game studios, a new COO, and a plan to flatten management from as many as 14 layers to no more than five.

“We will return to growth in 2027,” Sharma wrote. “History is full of companies that mistake longevity for inevitability. We will not be one of them.” 

Sharma, a startup veteran and former Microsoft AI leader, was named Xbox CEO in February. 

“I know this is painful,” she wrote. “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’s decisions do not reflect their talent or dedication.”

But she also reiterated what she said in a memo last month: Xbox’s business is not healthy, operating at margins 3-10x lower than industry peers after years of heavy spending that failed to produce the expected growth. 

About 1,600 of the Xbox job cuts take effect Monday as part of a broader round of 4,800 layoffs across Microsoft. The remaining Xbox reductions will come in the months ahead. Sharma acknowledged that a year-long restructuring “creates additional challenges” but said “it is not possible to make all the necessary changes in a single day.” 

Sharma said the cuts reach across Activision, Bethesda/ZeniMax, Blizzard, King, Mojang, and Xbox Game Studios, though no publicly announced games are being cancelled.

Several game studios will be spun out as standalone ventures, removing the costs from Microsoft’s books while giving the studios a chance to survive on their own.

• Compulsion Games (South of Midnight) and Double Fine Productions (Psychonauts) will return to their management teams as independent studios, keeping their intellectual property and current projects. 
• Ninja Theory (Hellblade) and Undead Labs (State of Decay) will shift to new owners with funding to complete their current games. 
• In France, Arkane (Dishonored, Deathloop) is beginning a legally required consultation with its employee works council to determine its future. 

Sharma will also take on direct oversight of game studios Mojang (Minecraft) and King (Candy Crush), Xbox’s two largest studios by monthly active players. 

In addition, she is establishing a new chief operating officer role with end-to-end financial responsibility across content, hardware, platform, and services. Helen Chiang, a nearly two-decade Xbox veteran who led Mojang and the Minecraft franchise, has been promoted to the role. Dave McCarthy, a 17-year Xbox veteran who helped build the platform, is retiring. 

Across the division, Sharma wrote in the memo, Xbox will cut vendor spending by 50% and reduce management layers from as many as 14 to no more than five.

The overhaul follows a 25-year period in which Microsoft largely subsidized Xbox as a strategic bet on the living room. Microsoft CEO Satya Nadella has said that era is over, noting that YouTube creators make more money from Xbox games than Microsoft does.

Microsoft is cutting 4,800 jobs, just over 2% of its global workforce, citing a need to revamp its sales and consulting division to keep pace with a rapidly changing tech industry, while overhauling its Xbox business in a push for long-term growth and profitability from gaming. 

The cuts include about 600 jobs in Washington state, home to Microsoft’s Redmond headquarters. That’s down from 3,200 job reductions locally a year ago. Combined with ongoing hiring, Microsoft’s workforce in the state is expected to remain stable at around 52,000 people.

About 1,600 of the 4,800 job cuts being announced Monday are in the Xbox division. Additional Xbox layoffs in the months ahead are expected to bring total job reductions in the gaming division to roughly 3,200, or about 20% of the global Xbox workforce, this fiscal year. 

Microsoft is also spinning off four Xbox game studios to operate independently. 

In an internal memo, Xbox CEO Asha Sharma called it the biggest restructuring in Xbox history, saying the division has been “operating at margins that are 3-10x lower than comparable platform and publishing businesses” and that studios have been losing 64 cents for every dollar invested.

Overall, top executives sought to distinguish Microsoft from other tech giants, saying the cuts were minimized by the redeployment of more than 4,000 employees into new roles over the past year and a voluntary retirement program that let thousands more exit by their own choice.

By comparison, the company last year cut more than 15,000 jobs globally in two rounds of layoffs in spring and summer 2025 — the largest reductions in more than a decade.

The latest cuts come amid record capital spending on the company’s AI infrastructure, pressure from Wall Street to keep operating expenses in check, and a 30% stock slide that has wiped out roughly $1.2 trillion in Microsoft’s market value over the past nine months.

“Microsoft can only be a strong employer if it has a successful business,” said Brad Smith, its president and vice chair, in an interview with GeekWire. “We have to adapt to change.”

Before the latest cuts, the company’s total workforce was about 220,000 people. Across the company, Microsoft expects worldwide headcount to decline year-over-year, CFO Amy Hood said on an April earnings call. 

Amy Coleman, Microsoft’s chief people officer, said in a memo to employees Monday morning that the roles the company is eliminating today are not being directly replaced by AI.

At the same time, she acknowledged, “AI is changing how work gets done.” She added, “Some of the tasks we do every day can now be automated, and that means we all need to keep learning, keep building new skills, and keep adapting as the work evolves.”

However, the line from Coleman’s memo that may get the most attention internally is this: “We are still early on this journey, and there will be more changes ahead; other parts of our business will need to make similar changes.”

In an interview, Coleman stopped short of signaling further layoffs across the company. Instead, she described a larger shift in how Microsoft manages its workforce. That includes reskilling engineers for customer-facing and AI-focused positions, and exploring how to make voluntary exit programs a regular part of the company’s operations — not just a one-time offer, but potentially something employees could opt into annually or on an ongoing basis.

Coleman confirmed that about 30% of roughly 8,750 eligible U.S. employees accepted Microsoft’s first-ever voluntary retirement program in recent weeks, in line with the company’s expectations, which reduced the size of the reduction in force announced Monday. 

The cutbacks and changes in the company’s sales and consulting teams build on last week’s launch of the Microsoft Frontier Company, a $2.5 billion initiative to embed 6,000 engineers inside customers to deploy AI. The shift is reducing some traditional sales and consulting roles and resulting in more technical positions working directly with customers. 

“We’re seeing that we need more engineering excellence in the customer space,” she said. 

Smith said software development is undergoing its biggest shift in the more than 50 years since Microsoft’s founding. The widespread use of AI is making code cheaper and faster to produce, but he said that’s also creating demand for new kinds of roles and work.

“Some things like coding require less time of software developers,” he said. “At the same time, there’s new parts that are growing, whether it’s the product management or software design, or perhaps most importantly, working directly with customers.”

Update: A filing by Microsoft on Monday under the Washington state Worker Adjustment and Retraining Notification Act listed 605 positions being eliminated in Washington state.

The roles span software engineering, product management, sales strategy, data science, business program management, marketing, and game design, among others — ranging from mid-level individual contributors to senior managers, consistent with cuts that reach across both the company’s technical ranks and its sales and consulting operations.