Microsoft lays off 1,600 employees and realigns Xbox division structure, divesting four studios

After more than two decades treating Xbox as a strategic investment, Microsoft is showing an intention to fundamentally change the direction of its gaming division. Driven by rising operational costs, decreased profit margins, and heavy investments in artificial intelligence, the corporation has initiated a restructuring process aimed at redefining the brand's future.

Need for Profitability for Xbox

According to a report released by GeekWire, Microsoft concluded that the cycle of pouring billions of dollars into Xbox expansion has reached its limit. In an internal communication addressed to employees, Asha Sharma, CEO of the Xbox division, stated that the business needs to become financially viable. The executive emphasized the urgency of cutting expenses and increasing the area's profitability.

This perspective was corroborated by Satya Nadella, CEO of Microsoft, who recently mentioned that the company subsidized Xbox for long periods but must now convert the operation into a profitable venture.

From Billion-Dollar Expansion to Cost Containment

In recent years, Microsoft has made some of the largest investments in the history of the gaming industry. These moves included the acquisition of ZeniMax Media, owner of Bethesda, for $7.5 billion, and the purchase of Activision Blizzard King for approximately $69 billion, marking the company's largest acquisition to date.

Despite enriching the catalog with titles such as Call of Duty, Diablo, Fallout, and The Elder Scrolls, the financial return has not kept pace with the growth of investments. The report indicates that the Xbox division currently operates with a profit margin close to 3%, a rate considered low for the segment.

Challenges of Game Pass and Hardware Market

The Xbox Game Pass business model also presents an obstacle. Although the service generates continuous revenue through subscriptions, making new releases immediately available in the catalog can decrease direct game sales, which have historically been a primary source of revenue in the industry.

Additionally, Microsoft faces difficulties in the hardware market. Market estimates indicate that the PlayStation 5 sold approximately twice the units of the Xbox Series X|S line, which reduces the user base and, consequently, the potential for game and subscription sales. The company has also implemented recent price increases for consoles, justifying the adjustment due to the rising cost of components, exacerbated by high demand for memory and AI chips.

Impact of Restructuring on Studios

Adjustments have already begun to affect the gaming division. There are recent rumors that Microsoft is evaluating the sale or closure of certain studios, in addition to reducing investment in projects classified as higher risk. Simultaneously, the strategy focuses on concentrating resources on the company's core franchises, such as Halo, Fallout, and Call of Duty, and expanding Xbox games' presence on other platforms, including PlayStation and Nintendo.

Future Prospects for Xbox

Even with the restructuring, Microsoft reaffirms its commitment to the gaming market. The company is also studying new formats for the future of Xbox hardware, considering possible partnerships and changes in console manufacturing tactics. The current focus is clear: transforming a division historically sustained by massive investments into an operation capable of generating stable results, even in an increasingly competitive market scenario.

The Xbox division may undergo a new and significant restructuring in the coming days. According to information released by journalist Tom Warren of The Verge, Microsoft is reportedly evaluating the closure of Arkane Lyon, a studio known for developing titles such as Dishonored and Deathloop, and is also considering the cancellation of the highly anticipated game Marvel’s Blade.

New layoffs and project risks

Such measures would be part of a new wave of layoffs scheduled to begin on July 6th. It is important to note that Microsoft has not yet issued any official confirmation regarding these rumors.

The title Marvel’s Blade, which was presented during The Game Awards in 2023, is developed by Arkane Lyon and would be the first game from the studio to feature the Marvel vampire hunter. According to rumors, the project is facing scheduling issues and exceeding the established budget, which has prompted Microsoft to consider its discontinuation. Since its announcement, Arkane has not provided new updates, images, or gameplay details about the game's development.

Studios under Microsoft's review

The restructuring evaluation is not limited to Arkane Lyon; other Xbox-owned studios are also being reviewed. Cited sources, including The Verge, Bloomberg, and GamesBeat, indicate that Microsoft is studying options such as sale, team reorganization, or closure for studios like Compulsion Games, Double Fine, Ninja Theory, Undead Labs, and Arkane Lyon. There is no definition yet on what actions will be taken regarding each of these groups.

Changes led by new management

Expectations for further cuts intensified after an internal communication issued by the new CEO of the Xbox division, Asha Sharma, along with content director Matt Booty. In this memo, the company admitted that it had expanded its operations beyond what was considered sustainable. The statement, as reported by international outlets, says: 'We are over-sized. From now on, this cannot continue.'

Unions representing Xbox employees have also criticized the company's lack of transparency, requesting negotiations before the implementation of cuts.

History of cuts at Arkane and Xbox

If the closure of Arkane Lyon is confirmed, it would represent another setback for one of the industry's most acclaimed studios. In 2024, Microsoft had already shut down Arkane Austin, responsible for the games Prey and Redfall, during another round of cuts that also affected Tango Gameworks, Alpha Dog Games, and several Bethesda studios. At that time, Dinga Bakaba, creative director of Arkane Lyon, publicly protested the decision, asking executives to treat developers as artists, and not merely as financial assets.

Xbox has been undergoing a long period of restructuring since the acquisition of Activision Blizzard, finalized in 2023 for approximately US$69 billion. During this period, Microsoft has promoted various reorganizations in its gaming division. In 2024 alone, about 1,900 employees were laid off across the Xbox, Activision, Blizzard, and ZeniMax teams. Additionally, another 650 professionals lost their jobs that year, while several studios were sold or closed. In 2025, a new wave of layoffs affected approximately 9,000 employees in different sectors of the company. Rumors suggest that the cuts planned for July 2026 could impact Microsoft partners, such as IO Interactive, which recently confirmed the end of an external partnership and reduced its staff. However, Hideo Kojima's project OD should not be affected.

Xbox Game Pass may face a considerable transformation, as there are rumors that Microsoft has temporarily suspended the formalization of new contracts with third-party publishers and independent studios. This action is reportedly occurring while the company reviews the overall strategy of its subscription service.

Source of the Rumors

The information, disclosed by insider eXtas1s, emerged during the First Playable event, focused on the game development market, held in Italy. According to this insider, several independent developers reported that ongoing negotiations to integrate their titles into Game Pass were abruptly halted.

Key Points of the Suspension

The main aspects mentioned in this rumor include the cancellation of proposals to add new games to Game Pass during negotiations, the complete halt of new contracts with third-party studios, and the possibility that this decision comes from the new leadership of the Xbox division, which is promoting a strategic reorganization of the platform.

Possible Reduction in Investments

If the rumors are confirmed, Microsoft would be reassessing a fundamental pillar of Game Pass: the financial contribution to third-party games made available directly in the catalog, often at launch (day one). In recent years, the company has invested hundreds of millions of dollars to secure these agreements with independent studios and publishers, establishing the service as an industry highlight.

Objective of the Strategic Review

According to the rumor, the purpose of this review would be to reduce operational costs and redefine the investment policy applied to Game Pass.

Impact on Independent Developers

The potential interruption of new contracts could have significant consequences for smaller developers. Many studios relied on these Game Pass agreements as a source of capital to develop their projects, receiving advances from Microsoft in exchange for including the games. Without this mechanism, small studios might be forced to seek other funding sources or rely exclusively on post-launch sales.

Official Position of Microsoft

To date, Microsoft has not issued any official statement regarding any changes to the Xbox Game Pass strategy. For this reason, the information brought by eXtas1s should be considered mere rumors until the company confirms any changes to the service's operation. If the restructuring is formalized, it could usher in a new phase for Game Pass, which has consolidated itself as a key differentiator of the Xbox ecosystem in recent years.