The Scale of Cuts
The cuts are happening in two phases. Microsoft has already eliminated 1,600 positions, with another 1,600 layoffs anticipated before June 2027. Combined with reductions across the broader gaming division, this represents approximately 2.1% of Microsoft’s total workforce, affecting roughly 4,800 employees company-wide.
The four studios being divested are Compulsion Games, Double Fine, Ninja Theory, and Undead Labs. All were acquired within the last eight years. Arkane Studios in France is also reportedly under consideration for sale or spin-off. These four studios account for approximately 350 of the affected employees.
Why Xbox Is Struggling
Sharma, who took over the gaming division in February, didn’t mince words about Xbox’s problems. The business operation is “not healthy,” she said, pointing to two specific issues: operating costs are too high, and the customer base simply isn’t large enough.
Both Game Pass, Xbox’s subscription service, and the internal game portfolio have failed to grow quickly enough. Previous attempts to fix this, like reducing Game Pass prices, haven’t moved the needle.
The underlying issue runs deeper. Xbox dominated during the Xbox 360 era in the early 2010s. Today, PlayStation is the global market leader with 50% market share. Nintendo Switch holds 27%. Xbox is down to 23%. Bloomberg reporter Jason Schreier documented how inconsistent strategy and a delayed focus on profitability after massive spending contributed to this decline.
What Happens to the Studios
The divested studios won’t simply vanish. CEO Sharma confirmed that new external owners have agreed to continue development on key titles. Ninja Theory‘s upcoming game Senua will move forward under its new owners. Undead Labs will continue working on State of Decay 3.
Other Xbox units including Activision, Bethesda/ZeniMax, Blizzard, King, Mojang, and Xbox Game Studios will also see reductions. However, all first-party games and publicly announced projects are still on track, according to Sharma.
That said, longtime reporter Stephen Totilo of Game File revealed that Xbox had already planned to divest Ninja Theory before announcing Senua at the recent showcase. The public reveal and the studio sale appear disconnected.
Industry Reaction
The cuts are being viewed as a blow to Xbox’s creative ecosystem. Podcast hosts Amanda Farough and Mike Futter argue the layoffs damage 25 years of accumulated creativity and goodwill. Futter speculated Microsoft might be streamlining operations to become an attractive acquisition target.
Game industry cuts are accelerating overall. The gaming sector has already lost 8,300 jobs this year, nearly double 2025’s total. “No one is safe,” Futter said, adding that successful games and creative contributions don’t necessarily protect jobs when leadership prioritizes cost-cutting.
Skepticism about Xbox’s future runs high. Video game reviewer Max Shockley of DreamcastGuy told CNET that Xbox has ceased to be a competitive platform. Reducing staff won’t produce more polished games, he argued, especially when titles are already releasing unfinished. He also doubted Xbox’s ability to deliver Project Helix, the upcoming hybrid console for Xbox and PC. “Their next-generation console will either not come out or will be fully built by someone else,” Shockley said.
What Comes Next
The restructuring is underway, but its long-term effects remain unclear. Xbox faces a choice: emerge as a leaner, more focused operation, or continue the spiral that brought PlayStation and Nintendo to dominance. For now, the immediate focus is on stabilizing Game Pass growth and ensuring that divested studios can actually finish the games already in development.
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