About one in five people at Xbox are losing their jobs. On Monday, July 6, Microsoft announced about 6,400 job cuts company-wide, under 3% of its workforce, with roughly 4,800 of them landing that first day. Its gaming side took the worst of it. About 3,200 of the total will hit Xbox over the coming year, 1,600 of them on day one, and several of its best-known studios are leaving the company.
If you play these games, your first thought is simple. Are my favorite games dead now? Mostly, no. Xbox boss Asha Sharma says none of the announced games are being cancelled, and most of the affected studios will keep working on their games, just under new owners. But the studios themselves are leaving Microsoft, and that's a big change.
How big the cuts are
Microsoft's total planned cuts come to about 6,400 people, under 3% of its workforce, and sales and consulting teams got hit too. Roughly 4,800 of those went on day one. Its gaming side is where it hurts most. Sharma told staff that 3,200 Xbox jobs will go during this financial year, about 20% of the division.
Around 1,600 people were let go right away on July 6, and the rest will be phased out over the coming months. Sharma called it the most significant restructure in Xbox history, and honestly, the numbers back that up.
Asha Sharma's Xbox reset memo, Livemint (Bloomberg) on the 6,400 company-wide total
Which studios got hit
Five studios are affected. Four are leaving Xbox, two of them becoming independent and two joining new owners, and a fifth, Arkane Lyon, is under review. Here is where they stand:
- Compulsion Games, the team behind South of Midnight and We Happy Few, is becoming independent again and keeps its games.
- Double Fine, the studio Tim Schafer founded and the maker of Psychonauts, is also going independent and keeps its games.
- Ninja Theory, the team behind the Hellblade series, is set to be sold to a buyer that Microsoft hasn't named yet, and its work on the Senua series continues.
- Undead Labs, the State of Decay team, is in talks to move to a new owner, and State of Decay 3 is still being made.
- Arkane Lyon, the studio behind Dishonored and Deathloop, is the one whose future is least certain, and its managers have started a formal review of options that could include closure.
None of these studios are being shut down outright, a real contrast with earlier Xbox layoffs that closed whole teams like Tango Gameworks and Arkane Austin. Some reports say Arkane Lyon's superhero game, Marvel's Blade, could be cancelled, but Microsoft hasn't confirmed that. By most reports, the studio in the most danger is Arkane Lyon, and the game most likely to be cut is Blade.
Xbox on the four studios leaving, Destructoid studio-by-studio roundup
Why this really happened
So why restructure a business full of award-winning studios? Money. In her reset memo, Sharma was blunt. "Our business today is not healthy," she wrote. "We are operating at margins that are 3 to 10x lower than comparable platform and publishing businesses." She added that in a typical year, Xbox lost 64 cents for every dollar it invested, and that the industry now faces the most severe hardware crisis in its history.
In the memo, Sharma pointed to the big bets Xbox made to grow, namely the Game Pass subscription, going multi-platform, and a broader slate of games. Those bets created real value, she said, but they did not grow at the pace Microsoft expected.
Game Pass also changed how studios get paid. Critics point out that a game can pull in a million players through the subscription and still not earn what selling copies at full price used to guarantee. Microsoft frames the studio moves as a broader reset rather than blaming any single deal, but that revenue math is a big part of why the old model stopped adding up.
South of Midnight passed a million players in three weeks, and Compulsion is still being spun out. Even a clear hit, it seems, wasn't enough to change the portfolio math.
Sharma's memo on Xbox margins, VGC on South of Midnight's player numbers
Is AI to blame
Here's the part everyone keeps asking about. Is this because of AI? Not directly. Nobody at Microsoft says a chatbot is replacing game developers, and Sharma's memo blames a weak, low-margin business, not AI.
But AI is the backdrop to all of it. Microsoft is spending tens of billions of dollars this year building AI data centers, far more than any single division like gaming brings in, even though the company doesn't break out exact Xbox profit. Reuters called these cuts part of an AI-driven wave of tech layoffs.
So while Xbox is told to pull its own weight, the money and attention across Microsoft are basically all flowing toward AI. Critics see the two as linked. Microsoft frames the cuts as fixing an unhealthy gaming business, and honestly, both things can be true at once.
Reuters on Microsoft's AI spending and cuts
What happens next
So what actually happens to these games and studios? Most of them survive, just not under Xbox. Double Fine and Compulsion own their games again and can build what they want, if they can find the funding. Ninja Theory and Undead Labs get new owners who are paying to finish the Senua game and State of Decay 3. The real casualty risk is Arkane Lyon and its Blade game. Watch that one.
One round of cuts probably won't fix this. With margins Sharma herself puts at 3 to 10 times below rivals, more layoffs and studio sales through 2027 wouldn't be a shock. Xbox increasingly behaves like a multi-platform publisher, putting its games on rival consoles and PCs even as it keeps selling its own hardware.
Whether that keeps the brand alive or slowly kills it is the real open question. For now, don't write off your favorite games. The honest label is "new owner," not "dead."
