Microsoft Is Cutting Thousands of Xbox Jobs and Nobody Knows What Comes Next

Microsoft laid off 1,600 Xbox employees in July 2026 and plans to cut another 1,600 over the next year, bringing the total to about 3,200 jobs lost by summer 2027 The Verge. The company is also closing at least four game studios, though one report puts the number at five Polygon.

New Xbox CEO Asha Sharma was direct about the problem in an internal memo: the Xbox business is "not healthy" Xbox. In an interview with Fortune, she said the company had "spread ourselves too thin" Fortune.

Sharma took over earlier this year. One of her first announcements was a teaser for a new Xbox console called Project Helix. Microsoft's gaming engineers said at a developer conference in 2026 that the console won't reach its testing phase until 2027 The Verge.

Two studios are being sold off: Double Fine and Compulsion Games The Verge. A third studio that had released only one game since Microsoft bought it is being shut down Yahoo Finance. Microsoft still owns major game companies like Bethesda (makers of Fallout and Elder Scrolls), Halo Studios, Minecraft's creator, and Blizzard Entertainment.

What Might Happen Next

These cuts have raised questions about whether Microsoft will eventually spin off its gaming division. The company could turn it into a smaller subsidiary, a partnership with another company, or sell it off entirely The Verge.

Joost van Dreunen, a professor at NYU who studies the gaming industry, told The Verge that a complete sale "looks likelier given Xbox's struggles with hardware costs rising and Microsoft's focus on AI." He also pointed out that "it's never been clear what role Xbox plays in Microsoft's broader strategy."

Van Dreunen said an outright sale is less likely because very few companies could afford to buy a gaming business worth over $23 billion a year. Netflix, Amazon, Tencent, and some wealthy government investment funds might be able to, but each has its own complications. Tencent, a Chinese technology company that owns stakes in many game studios, is actually backing away from some of its gaming investments in Asia right now, which would make it an unlikely buyer The Verge.

Why This Matters

This is not just about cutting costs. Microsoft's leadership — especially Sharma's language about the division being "not healthy" — is unusually blunt for a unit that still brings in tens of billions of dollars a year. That frankness suggests Microsoft's priorities have shifted. The company is now pouring more money and attention into artificial intelligence and cloud computing, the back-end servers that power the internet.

The timing creates a real challenge. Microsoft is asking its smaller, weakened Xbox team to build and launch a brand-new console in 2027. The company has managed tighter teams before and still shipped products on schedule, but there is little room for mistakes or delays.

The real story is not the number of jobs cut but what it says about where Microsoft's money and focus are going. A company that publicly questions its gaming division's health while prioritizing AI and cloud infrastructure is sending a clear signal to its investors about what matters most. Whether Xbox ends up as a smaller, independent company, a partnership, or stays inside Microsoft, that signal has already been sent. For now, the company has not made any final decisions, and nobody outside Microsoft seems to know which path it will take.