Microsoft cuts 4,800 jobs as Xbox division faces massive overhaul

Microsoft announced Monday it is slashing 4,800 jobs, or 2.1% of its total workforce, marking another significant round of cost-cutting as the tech giant grapples with intensifying competition in artificial intelligence and stagnating growth in key divisions.

The cuts hit Xbox especially hard. The gaming division will lose approximately 3,200 employees over time, representing 20% of its staff. Half of those layoffs happened immediately on Monday, with the remaining 1,600 positions being eliminated throughout fiscal year 2027. Xbox CEO Asha Sharma acknowledged the extended timeline would create “additional challenges,” but explained that “it is not possible to make all the necessary changes in a single day.”

Why the cuts hit Xbox hardest

Xbox has become a drag on Microsoft’s business performance. While cloud services and LinkedIn have posted accelerating growth in recent quarters, the gaming unit has watched revenue shrink. That weakness, combined with Microsoft’s broader struggles in enterprise software as investors worry about generative AI disruption, made Xbox an obvious target for restructuring.

As part of the announcement, Microsoft is spinning out four gaming studios. Compulsion Games and Double Fine Productions, both acquired in the 2010s, will regain independence. Ninja Theory and Undead Labs, which joined Microsoft in 2018, have “entered terms to join new ownership,” according to Sharma. The moves amount to a quiet admission that these studios no longer fit Microsoft’s strategic vision.

Double Fine wasted no time celebrating the change. “We’re thankful to everyone at Xbox for seven great years together, and for working with us to reach an outcome which preserves our history and culture, and returns ownership of our games to us,” the studio posted on X.

France-based Arkane Studios, acquired through the $8.1 billion ZeniMax Media deal in 2021, is also reviewing “strategic options” with its works council, suggesting more gaming exits could follow.

The AI question nobody’s answering

Microsoft’s stock has been the worst performer among megacap tech companies so far in 2026, down 19% as of Friday’s close. The market’s concern centers on CEO Satya Nadella’s failure to articulate a compelling strategy for developing and monetizing artificial intelligence models and services. That uncertainty weighs heavily on investor sentiment.

Interestingly, Microsoft’s chief people officer Amy Coleman pushed back against suggestions that AI is displacing workers. She wrote that AI isn’t replacing the laid-off employees, but rather changing how work gets done. “Some of the tasks we do every day can now be automated, and that means we all need to keep learning, keep building new skills, and keep adapting as the work evolves,” Coleman stated in her message to employees.

Yet this explanation rings somewhat hollow when paired with the reality that Microsoft is simultaneously restructuring entire divisions while the company pivots toward AI capabilities.

What’s next for Xbox?

DA Davidson analyst Gil Luria suggested on CNBC that Microsoft might eventually spin off Xbox entirely. “This is not a business Microsoft needs to be in, or should be in,” Luria said. The comment reflects growing sentiment that a standalone gaming company could operate more effectively than Xbox does as part of a software conglomerate.

Monday’s announcement follows April’s introduction of a voluntary retirement program, a first for Microsoft. More than one-third of eligible employees accepted the offer, indicating substantial organizational appetite for change. The company signaled it will “continue exploring similar approaches in the future.”

Microsoft shares slipped just 1% during Monday trading, while the broader Nasdaq Composite climbed 1%. The modest market reaction suggests investors have already priced in significant restructuring expectations.

Microsoft has conducted multiple rounds of layoffs over the past year, including a 9,000-person cut previously announced. These moves represent the company’s ongoing effort to right-size its workforce and redirect resources toward higher-growth opportunities, particularly in cloud computing and artificial intelligence services where competition intensifies daily.

Source: CNBC

The real question isn’t whether Microsoft can cut its way to profitability, but whether it can innovate fast enough to justify the valuations investors once assigned it.