Microsoft poured more than $20 billion into its Xbox division over the past five years. The return on that investment has been, to put it charitably, underwhelming.

Under newly appointed CEO Asha Sharma, the Xbox division is planning to close multiple studios and cut what could amount to around 1,000 positions as part of a sweeping reorganization. The layoffs are expected to land in July 2026, just months after Sharma took the reins in late February.

A $500 million problem

The math here is brutal. Xbox’s revenue has declined by approximately $500 million on a year-over-year basis. The division is operating on a profit margin of roughly 3%.

An internal memo co-signed by Sharma and Xbox Game Studios head Matt Booty laid out a “Next 100 Days” initiative. The document frames the coming months as a “reset” period, one focused on making hard choices to ensure the division’s long-term viability.

Sharma previously served as President of Microsoft’s CoreAI division before being tapped to lead the gaming unit. She inherited a business that has been bleeding money despite Microsoft’s aggressive acquisition strategy, which included the landmark purchase of Activision Blizzard.

A pattern, not an anomaly

This isn’t Xbox’s first round of painful cuts. In 2024, Microsoft shuttered several studios, including Arkane Austin (the team behind Redfall), Tango Gameworks (which had just shipped the critically acclaimed Hi-Fi Rush), and Alpha Dog Games.

Microsoft has been running iterative budget cuts and strategic re-evaluations since 2024, and the Sharma era appears to be an acceleration of that cost-control posture rather than a departure from it.

What this means for the gaming market

Analysts have flagged that layoffs of this scale often come with reduced marketing expenditure, which could further dampen Xbox’s visibility during a critical period for the console market.

Console sales have been lackluster for Xbox, and Microsoft has increasingly leaned into a platform-agnostic approach, bringing formerly exclusive titles to PlayStation and other platforms.