Washington: Microsoft has announced the largest restructuring in the history of its Xbox gaming division, unveiling plans to cut around 3,200 jobs and separate four game development studios as part of a sweeping overhaul aimed at restoring long-term growth. The company said the changes are intended to simplify operations, reduce costs and strengthen Xbox’s position in an increasingly competitive gaming market.

Microsoft begins major Xbox overhaul

Xbox CEO Asha Sharma described the move as “the most significant restructure in Xbox history” in an internal memo shared with employees.

According to the company, approximately 1,600 employees will be laid off immediately, with additional workforce reductions planned through Microsoft’s 2027 fiscal year. The combined cuts are expected to affect nearly 3,200 employees across the gaming business.

The restructuring follows slower-than-expected growth in Xbox’s core business, weaker adoption of the Game Pass subscription service and rising pressure across the global gaming industry.

Four studios to separate from Xbox

As part of the reorganisation, Microsoft will separate four studios from Xbox’s first-party portfolio:

  • Compulsion Games
  • Double Fine Productions
  • Ninja Theory
  • Undead Labs

Compulsion Games and Double Fine Productions will return to independent ownership along with their intellectual property and existing game catalogues.

Meanwhile, Ninja Theory and Undead Labs will move under new ownership while receiving funding to complete ongoing projects, including Senua and State of Decay 3.

The company also confirmed that Arkane Studios in France has begun consultations regarding potential strategic options, including a possible sale or spin-off.

Xbox cites slowing growth and hardware challenges

Explaining the reasons behind the restructuring, Sharma acknowledged that Xbox’s business performance has fallen short of expectations.

She said the gaming division has been operating on significantly lower profit margins than competing gaming platforms and publishers. While investments in Game Pass, multi-platform publishing and major studio acquisitions created value, they did not deliver the expected pace of business growth.

Sharma also described Xbox’s current console situation as “the most severe hardware crisis in its history,” noting that the company entered the present console generation with a smaller installed user base and a higher operating cost structure. She added that rapid expansion through acquisitions had further increased organisational complexity.

Management structure to be streamlined

Alongside job cuts, Microsoft plans to simplify Xbox’s leadership hierarchy by reducing management layers from as many as 14 to no more than five.

The company has also appointed Helen Chiang as Xbox’s first Chief Operating Officer. She will oversee content, hardware, platform and services under a unified operating model designed to improve efficiency and decision-making.

Existing game projects to continue

Despite the large-scale restructuring, Microsoft has assured players that none of Xbox’s publicly announced first-party games have been cancelled.

The company said development on existing titles will continue, with the restructuring focused on improving operational efficiency rather than reducing its future game lineup.

The overhaul marks one of Microsoft’s biggest organisational changes in gaming and reflects the broader challenges facing the global video game industry as companies seek sustainable growth amid rising development costs and changing consumer demand.