Microsoft is undergoing a significant restructuring of its Xbox division, announcing plans to cut around 3,200 jobs, a substantial 20% of its Xbox workforce. This move is part of a broader initiative that includes a total of 4,800 job cuts across the company. Despite the turbulence in the gaming sector, Microsoft’s overall revenue is reportedly still on the rise.
Overview of Xbox Restructuring
Approximately 1,600 of the announced layoffs were effective immediately, with an additional 1,600 expected as the fiscal year progresses. Furthermore, four game studios are being either spun off as independent entities or sold to new owners. The studios affected include Compulsion Games and Double Fine Productions, which will operate independently, while Ninja Theory and Undead Labs will transition to new ownership. Xbox head Asha Sharma stated that the number of management levels would be reduced significantly, from up to 14 to a maximum of five, and in some areas, down to three. While the exact cost of this restructuring has not been disclosed, a previous voluntary early retirement program initiated in April 2026 has already helped to reduce the scale of the required cuts. Sharma emphasized in her memo, “Our business is not healthy today.”
Reasons for the Drastic Downsizing
According to Sharma, Xbox’s profit margins are disturbingly low, reported to be three to ten times under those of comparable platform and publishing providers. This has resulted in substantial losses, with the division losing 64 cents for every dollar invested on average in a given year. Microsoft’s most recent quarterly report revealed that in Q3 of fiscal year 2026, Xbox’s revenue dropped by $380 million, or 7%, compared to the same quarter last year. Revenue from Xbox content and services, including Game Pass, fell by 5%, while hardware sales plummeted by 33% due to decreased console sales. This ongoing restructuring reflects a troubling trend: Microsoft had previously reduced its workforce in two waves in 2025, laying off approximately 15,000 employees during those rounds.
Impact on Microsoft’s Overall Finances
Despite the upheaval in its gaming division, the gaming segment remains a minor issue for Microsoft on the whole. The More Personal Computing segment, which includes Xbox, Windows, and Search, generated $13.2 billion in Q3 of fiscal year 2026, reflecting only a 1% decrease from the previous year. Overall, Microsoft reported an 18% revenue increase, reaching $82.9 billion, with a net profit increase of 23% to $31.8 billion, largely attributed to its cloud business. Analyst Gil Luria from D.A. Davidson highlighted a crucial question: “This is not a business that Microsoft needs to be in or should be in.”
Severe Criticism from PR Experts
The restructuring prompted sharp criticism from PR consultant and tech podcaster Ed Zitron. In a post on platform X, he remarked that the overhaul indicates deeper management issues, particularly concerning the company’s handling of AI investments. He described the changes as a result of “catastrophic mismanagement by a company run by a sub-McKinsean imbecile that hires other losers to move money around to hide how bad his AI plays are.” Zitron’s harsh rhetoric painted Microsoft as a disgrace to the software industry.
Future Concerns and Next Steps
The upcoming report for the fourth quarter of fiscal year 2026 will serve as a crucial benchmark for Microsoft, assessing whether the announced cost reductions will positively impact profit margins as further job cuts loom. With another 1,600 Xbox layoffs scheduled for the ongoing fiscal year, stakeholders remain on high alert about the implications for the company’s future in gaming and technology.
