Microsoft has initiated its most substantial restructuring in Xbox history, announcing approximately 3,200 layoffs across its gaming division and the departure of four studios.
In an internal email to staff, Xbox CEO Phil Spencer detailed the sweeping changes, which are intended to address the division's current business challenges and reset its strategic direction. Spencer stated that the business is operating at significantly lower margins compared to industry peers, attributing this to a higher cost structure and slower-than-expected growth from initiatives like Game Pass and multi-platform strategies. The industry's current hardware crisis was also cited as a factor.
"We must reset XBOX," Spencer wrote, emphasizing a need for greater focus, discipline, and clarity in future investments.
The restructuring impacts multiple Xbox studios, including Bethesda/ZeniMax, Activision Blizzard, Mojang, and Xbox Game Studios. Specifically, Compulsion Games, the studio behind South of Midnight, and Double Fine Productions, known for Psychonauts, will transition to independent studios, retaining their intellectual property and catalogs. Ninja Theory, developer of Hellblade, and Undead Labs, the creators of State of Decay, have entered agreements to be acquired by new ownership with funding to continue development on Senua and State of Decay 3, respectively. Arkane, the studio behind Deathloop and the upcoming Marvel's Blade, is entering a consultation period with its works council to review potential strategic options, with its future status uncertain.
Spencer also announced structural changes within Xbox itself, aiming to simplify operations and reduce management layers. The company plans to flatten its organizational structure and streamline workflows across tools and codebases, alongside a significant reduction in vendor spending. Helen Chiang has been promoted to Chief Operating Officer with end-to-end P&L responsibility across content, hardware, platform, and services, reporting directly to Spencer. Dave McCarthy, who has been with Xbox for 17 years, is retiring.
Despite the significant workforce reductions and studio realignments, Spencer assured that none of the first-party games publicly announced are being canceled as part of these changes. Mojang and King will now report directly to Spencer, recognizing their importance as platforms with large active player bases.
The stated goal of these measures is to position Xbox for future growth, with the company aiming to return to growth in 2027 and become a dominant force in the entertainment industry, reaching over a billion people daily. "These changes are about a bigger future for XBOX, not a smaller one," Spencer concluded.