Xbox Cuts 3,200 Jobs in 'Most Significant Restructure' in History

Microsoft's Xbox division announced on 6 July 2026 that it is cutting approximately 3,200 jobs and releasing four of its owned studios in what new CEO Asha Sharma has called "the most significant restructure in Xbox history." Around 1,600 positions were eliminated immediately on 7 July, with the remaining cuts phased through to 30 June 2027. The reductions form part of a wider Microsoft announcement of roughly 4,800 job losses across the company on the same day.

Sharma published a memo titled "Resetting Xbox" on Xbox Wire and her X account on the morning of 6 July, pulling no punches about the state of the business she inherited.

"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."

Four Studios Walk Out the Door

The most striking element of the announcement is the departure of four Xbox-owned studios, collectively employing around 350 people. Two are being returned to their founders: Double Fine Productions, creator of Psychonauts, reverts to founder Tim Schafer, while Compulsion Games, which made South of Midnight, returns to founder Guillaume Provost. Both studios will retain full rights to all of their intellectual property — including work created during the Xbox era — and Microsoft is providing runway funding to help them attract new publishers and investors.

Ninja Theory, the Cambridge studio behind the Hellblade/Senua series, and Undead Labs, developer of State of Decay 3, have "entered terms to join new ownership with funding to complete and grow" their respective in-development titles, according to Sharma's memo. Microsoft has not yet disclosed which companies have acquired the studios. Undead Labs posted its own statement confirming: "We're transitioning out of Xbox and while we can't share all the details just yet, we can tell you this: State of Decay 3 is still coming."

A fifth studio, Arkane Lyon — currently working on Marvel's Blade — has entered legally required consultation under French employment law to review its options. Its fate remains unclear.

Deep Cuts at Obsidian, id Software and ZeniMax

The immediate 1,600 redundancies also hit studios remaining inside Xbox. Sharma confirmed reductions "across other units," naming Activision, Bethesda/ZeniMax, Blizzard, King, Mojang, and Xbox Game Studios.

• Obsidian Entertainment lost around 25% of its workforce — approximately 60 to 70 workers — with layoffs spread across departments, according to a Kotaku report.
• id Software, maker of Doom: The Dark Ages, has reportedly lost around 50% of its staff, with reports suggesting most or all of its coding team has been let go. Microsoft has not officially confirmed the full figures.
• ZeniMax Online Studios, which operates The Elder Scrolls Online, confirmed the loss of 213 employees. The studio said the cuts will affect its previously announced 2026 roadmap, with its immediate focus now on launching Season One.
• Blizzard Entertainment employees were told the restructuring affects them but that further communications would follow.
• IO Interactive's Istanbul studio has been shut down after Microsoft pulled funding for its game codenamed "Project Fantasy." The Istanbul office, opened in 2023, also worked on 007: First Light and Hitman.

Sharma stated in her memo that "none of our first-party publicly announced games or projects are being cancelled as part of these reductions."

A Strategy That Spread Itself Too Thin

The restructure is, at its core, an admission that Xbox's post-pandemic growth strategy failed. Speaking separately to Fortune magazine, Sharma said: "In order to grow, we made a bunch of bets… and as we did that, we inherently didn't focus on the core business. The number one measure of your strategy is what you put your resources behind, and we simply spread ourselves too thin."

The figures behind that admission are stark. Despite investing over $20 billion in content and hardware across five years — excluding the $68.7 billion Activision Blizzard acquisition — annual gaming revenue has fallen by nearly half a billion dollars. Microsoft's latest financial report showed a 7% drop in quarterly gaming revenue, with Xbox hardware sales down 33%. Gaming now accounts for just 6% of Microsoft's total revenue.

Game Pass, the subscription service meant to be the engine of Xbox's future, has 30 million subscribers today — against an internal target of 77 million by fiscal year 2026. That figure is actually four million lower than when Microsoft last shared subscriber data publicly in 2024, a decline partly attributed to a 50% price hike announced last October. The monthly Game Pass Ultimate price rose from $20 to $30 before Xbox walked it back to $23 in April 2026.

Who Is Now Running Xbox?

Sharma, who took over from 38-year Microsoft veteran Phil Spencer in February 2026, previously held senior roles at Instacart and Meta Platforms. She is now taking direct oversight of Mojang (Minecraft) and King (Candy Crush) — Xbox's two largest studios by monthly active players. A new chief operating officer role has been created with end-to-end financial responsibility; Helen Chiang, a nearly two-decade Xbox veteran who led Mojang and the Minecraft franchise, has been promoted to fill it. Dave McCarthy, a 17-year Xbox veteran who helped build the platform, is retiring.

Sharma's memo outlined that Xbox will cut vendor spending by 50% and reduce management layers from as many as 14 to no more than five. Her closing message was pointed: "These changes are about a bigger future for Xbox, not a smaller one."

Whether players — and the studios that remain — will believe that remains to be seen.