Xbox will cut 3,200 roles through fiscal year 2027 — roughly 20% of the gaming unit — and divest four studios, according to a layoff email from new Xbox CEO Asha Sharma. The move includes 1,600 cuts effective Monday and accounts for two-thirds of a companywide Microsoft reduction affecting 4,800 workers.

"Our business today is not healthy," Sharma wrote. "We are operating at margins that are 3-10x lower than comparable platform and publishing businesses."

Sharma took the Xbox job in February, succeeding longtime chief Phil Spencer. She joined Microsoft in 2024 from Instacart, where she led product, and previously served as president of product in Microsoft's Core AI business.

What changes for Microsoft's studios?

Beyond the divestitures, Sharma is flattening management layers and taking direct oversight of some studios, including "Candy Crush" maker King. She told staff that not all studios are driving returns, writing that in a typical year "we lost 64 cents for every dollar we invested."

Some Xbox employees said they had anticipated cuts given the unit's struggles, but not at this scale. "Nobody was expecting it to be this bad," one laid-off studio employee told Business Insider.

Microsoft HR chief Amy Coleman said the cut roles are not being replaced by AI. The layoffs land as Microsoft pours billions into AI infrastructure; investor anxiety over AI disruption helped send the stock down 19% in June, its worst month since the dot-com era.

Why did the Activision bet underdeliver?

Sharma inherits the consequences of two major acquisitions: ZeniMax Media (parent of Bethesda Softworks) for roughly $8 billion in 2021, and Activision Blizzard for roughly $69 billion in 2023. The strategy aimed to make Game Pass a subscription-driven platform stocked with first-party blockbusters, offsetting a console business that has long trailed Sony's PlayStation and Nintendo's Switch in hardware sales.

"Call of Duty" has not delivered the hoped-for subscriber surge, according to Benchmark analyst Mike Hickey, leaving Xbox with a larger content operation and insufficient growth to support it.

"It's pretty clear the game creates more value as an $80 premium release than a subscriber acquisition tool that really hasn't delivered," Hickey said. He described the layoffs as necessary: "They overbuilt the organization. They added studios, employees, and management layers, all while growth was slowing. And they created a cost basis that's become difficult to support."

Wedbush Securities analyst Michael Pachter backed Sharma's approach: "Asha is doing the right thing. Asha is far more interested in doing what's right than being popular."

How much wider is the industry squeeze?

Excluding Monday's Xbox cuts, an estimated 4,600 game industry jobs have been eliminated so far this year, per an online tally compiled by Farhan Noor, a California technical artist — against 5,300 in all of 2025 and 14,600 in 2024. Sony's PlayStation division has also cut staff in recent years.

Blockbuster budgets keep climbing as studios chase longer, costlier projects. Some analysts estimate Rockstar Games spent between $1 billion and $1.5 billion on "Grand Theft Auto VI," due in November.

Console economics have also inverted. Historically, hardware prices fall as a generation ages; instead, AI-driven demand for memory and storage has pushed component costs up, Pachter said. Microsoft will raise Xbox console prices by $100 to $150 depending on model starting August 1, following Sony's similar PlayStation 5 increase in April.

Engagement is concentrating too. Players devote more hours to a small set of long-running, regularly updated titles such as Epic Games' "Fortnite," squeezing room for new releases. "Grand Theft Auto VI" could intensify that dynamic if players commit months or years to it.

Despite the pressure, demand is not the problem. Global industry revenue should grow 4.2% this year to $260 billion, according to Joost van Dreunen, CEO of an analytics firm and professor at NYU's Stern School of Business.

"Game companies are expected to improve margins and, to achieve that, are cutting jobs," he said.

Watch for the four studio divestitures to name buyers — and for "Grand Theft Auto VI"'s November launch to test whether a single release can absorb the market's attention, and its margins, at Xbox's expense.