Microsoft laid off 1,600 Xbox employees in early July 2026, with plans to cut another 1,250 positions over the next year. That adds up to 2,850 total job losses in the gaming division—more than a third of the 4,800 jobs Microsoft is cutting across the entire company.

Microsoft announced the changes in a blog post titled "The latest in our company transformation," but did not provide specific numbers for the Xbox division. News outlets pieced together the details from reporting and statements from the workers' union.

Unlike previous layoffs, Microsoft is not shutting down studios entirely. Instead, it is selling four studios to other companies. Double Fine and Ninja Theory, two well-known game developers, are negotiating to become independent rather than disappear. Microsoft had already begun cutting contracts with outside vendors before the main layoffs arrived.

The cuts hit some major studios particularly hard. Bethesda and ZeniMax, which make games like Fallout and The Elder Scrolls, lost significant staff. At id Software, roughly half the employees were let go. Workers' unions at Bethesda expressed public frustration over the layoffs.

Asha Sharma, a former Microsoft executive, became the CEO of Xbox in February 2026, taking over from Phil Spencer. She previously worked as Microsoft's Chief Operating Officer before moving to the gaming division.

Microsoft's problems with Xbox go back more than a decade. In 2013, the original Xbox One launched with strict digital-rights restrictions and requirements to be always connected to the internet. Public backlash forced Microsoft to change course, but the damage was done. The PlayStation 4 pulled ahead, and Xbox never fully caught up.

Today, Xbox is cutting staff at levels the division has never seen before. Under the previous leadership, the focus shifted away from exclusive games for Xbox consoles and toward a subscription service called Game Pass that works on multiple devices and platforms. Whether this new restructuring is meant to fix that strategy, respond to normal ups and downs in the industry, or simply reduce costs as Microsoft invests more in artificial intelligence is not clear from what the company has said publicly.

Why sell studios instead of shutting them down. It means Microsoft believes those game studios and their popular franchises still have value. A buyer can take that value further than Microsoft wants to manage it itself. For the workers at those studios, this matters enormously: their jobs depend on whether the new owner keeps them on or restructures the team again.

Microsoft says these cuts are part of a broader wave of layoffs across the tech industry driven by investment in artificial intelligence. But the pattern here looks different. The studios losing the most people have decades of history making famous games. Artificial intelligence tools do not typically affect game development deep enough or fast enough to cause layoffs this large this quickly. The union complaints and job losses at id Software point to something simpler: Microsoft is restructuring how much it spends to run these studios, whatever the public explanation may be.

The gaming industry has weathered big changes before—new consoles, battles between companies fighting for your attention, the shift to streaming and subscriptions. Xbox's current challenge is whether its Game Pass subscription service can keep producing enough games to stay competitive. How Asha Sharma steers the company through the next few years will define whether it can.