Microsoft’s gaming division is undergoing the biggest shakeup in Xbox history. According to the company’s new leadership, the business model that “bet on Game Pass, multi-platform, and a broader portfolio of content” ultimately failed to deliver a healthy business.
Xbox Consoles – Microsoft
As part of a sweeping restructuring, Xbox CEO Asha Sharma announced that approximately 3,200 employees will lose their jobs by the end of fiscal 2027. The company is also spinning off or selling multiple studios as it attempts to reverse years of disappointing financial performance.
Xbox Says Its Business Is “Not Healthy”
In an internal memo released alongside the layoffs, Sharma offered one of the clearest acknowledgements yet that Xbox’s aggressive investment strategy failed to produce a sustainable business.
Rather than blaming any single decision, the Xbox CEO pointed to a combination of Game Pass expansion, multiplatform publishing, hardware subsidies, and massive investments in content as contributing factors behind Xbox’s weak financial position.
This is an important email I sent today to all employees at XBOX:
Team,
We are beginning the most significant restructure in XBOX history. After careful consideration, I’ve made the difficult decision to reduce our team by approximately 3,200 throughout FY27. This will include…
— ASHA (@asha_shar) July 6, 2026
“Our business today is not healthy,” she wrote. “We are operating at margins that are 3–10x lower than comparable platform and publishing businesses.”
A Three-Step Plan to “Reset Xbox”
To “reset Xbox,” Sharma outlined a three-step plan aimed at simplifying the company’s structure and restoring profitability.
The first step focuses on resetting Xbox’s content portfolio. This includes transitioning several studios to independent or new ownership, including returning Compulsion Games and Double Fine Productions to their management teams along with their intellectual property and development runway.
Asha Sharma at Microsoft Ignite 2024 – Microsoft Events, YouTube
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Ninja Theory and Undead Labs will move to new owners with funding to complete their current projects. Broader reductions across Activision, Bethesda, Blizzard, and other units are intended to refocus resources on higher-priority projects without canceling any publicly announced games.
The second step targets Xbox’s platform operations, which Sharma said have become overly complex, with as many as 14 layers of management in some areas.
“That complexity has slowed decisions, blurred accountability, and made it harder to deliver for players,” Sharma wrote. “As we reset XBOX, we will simplify.”
Sharma outlined plans to flatten the organization to no more than five management layers—ideally three—prioritizing individual contributors, player-coaches, and directly responsible leaders to accelerate decision-making and improve accountability.
A screenshot of Master Chief via Halo YouTube
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Finally, the company will reset its day-to-day operations. Longtime executive Helen Chiang has been appointed Chief Operating Officer with end-to-end profit-and-loss responsibility for content, hardware, platform, and services.
“She will bring our businesses together under one operating model, making sure we make clear investment decisions, learn from our successes and failures, and hold ourselves accountable for results,” Sharma wrote.
Game Pass Didn’t Deliver the Returns Microsoft Expected
Although Sharma never singled out Game Pass alone, the Xbox game subscription service was specifically listed among the strategic bets that failed to generate sufficient returns.
The Game Pass logo – Microsoft, XBOX
For years, Microsoft positioned Game Pass as the future of Xbox. The company spent billions acquiring studios including Bethesda and Activision Blizzard while repeatedly arguing that first-party exclusives would strengthen the subscription service and expand the Xbox ecosystem.
Instead, Xbox now says those investments drove up costs without producing the business growth the company expected.
A Dramatic Change in Direction
Ultimately, “reducing management layers” and “spinning off” studios is corporate language for layoffs. Yet Sharma’s memo also amounts to something rarely heard from a major gaming executive: an admission that Xbox’s long-term strategy failed to produce the healthy business Microsoft envisioned.
Whether the restructuring proves sufficient remains to be seen. But after years of betting on Game Pass, acquisitions, and rapid expansion, Microsoft is now making a very different bet—that a smaller, leaner Xbox is the company’s best path forward.
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