Xbox Cuts 3,200 Jobs and Divests Five First-Party Studios in Massive Restructuring

Microsoft is laying off 3,200 Xbox employees over the current financial year and divesting five of its first-party studios, according to an internal company memo. The restructuring represents a swift 20% contraction of its gaming workforce, and a sharp reversal for a company that spent years buying studios up.

Xbox CEO Asha Sharma admitted in the internal memo that the Xbox business is "not healthy," pointing directly to Game Pass investments that failed to meet the company's internal expectations. To assist those affected, the United Videogame Workers union (UVW-CWA) has launched a hardship fund to support laid-off developers across the United States and Canada.

The details

• Total job cuts: 3,200 roles (20% of the Xbox workforce), with 1,600 eliminated immediately on July 6
• Divested studios: Double Fine Productions and Compulsion Games return to independent status; Ninja Theory and Undead Labs sold to new ownership
• Bethesda pivot: Deep cuts at id Software and ZeniMax Online Studios, with Bethesda shifting focus to legacy franchises
• Strategic review: Arkane Lyon has entered a required consultation period

What is happening to the studios

Under the restructuring plan, Double Fine Productions and Compulsion Games are returning to independent status. Both studios will retain the intellectual property rights to their respective franchises, including Psychonauts and the upcoming South of Midnight.

Meanwhile, Ninja Theory and Undead Labs are being sold to new ownership. This change means Undead Labs' upcoming State of Decay 3 is no longer obligated to launch day-and-date on Xbox Game Pass. Arkane Lyon, currently developing Marvel's Blade, has entered a required consultation period to review its strategic options.

ZeniMax Media and Bethesda are also facing cutbacks. Layoffs are hitting id Software and ZeniMax Online Studios as Bethesda shifts its development strategy to focus on established franchises like Fallout, Elder Scrolls, Doom, Quake, and Wolfenstein.

How did we get here

In her memo to staff, Sharma laid out a bleak assessment of the division's health, acknowledging that the bets placed on Xbox Game Pass did not pan out. The acquisition cycle of the last few years has shifted into a consolidation effort.

In the same memo, Sharma reaffirmed Microsoft's long-term goal of reaching 1 billion daily active players, stating the company can still achieve it. That goal stands even as the division cuts a fifth of its gaming staff and returns studios to independence.

Why it matters

This restructuring marks a turn away from Xbox's acquisition strategy. For years, Microsoft acquired studios to build a subscription library; now the company is offloading some of those same assets. By releasing studios back into independence and narrowing Bethesda's focus to established franchises, Xbox is shifting from acquisition-led growth toward a smaller, more focused first-party lineup.