Microsoft lays off 3,200 Xbox employees and divests studios like Compulsion Games, Double Fine, Ninja Theory, Undead Labs, and Arkane, admitting prior acquisitions were a financial mistake.
<p>Last month, Xbox executives <a href="https://arstechnica.com/gaming/2026/06/this-cannot-continue-xbox-leaders-lay-out-hard-truths-behind-sagging-brand/">laid out some "hard truths"</a> about Microsoft's struggling gaming division that they said would require a difficult "Xbox reset." This morning, Microsoft <a href="https://news.xbox.com/en-us/2026/07/06/resetting-xbox/">revealed the brutal shape of that "reset,"</a> announcing plans for 3,200 layoffs and the divestment of five smaller studios that the company has spent years acquiring and shepherding.</p>
<p>Half of those 3,200 layoffs are effective today, <a href="https://arstechnica.com/gaming/2026/02/microsoft-gaming-chief-phil-spencer-steps-down-after-38-years-with-company/">new Xbox CEO Asha Sharma</a> wrote, while the other half will come by the end of Microsoft's 2027 fiscal year (which runs through June 30, 2027). <a href="https://www.cnbc.com/2026/07/06/microsoft-cuts-2point1percent-of-employees-as-xbox-unit-plans-to-spin-studios.html">CNBC</a> cites "a person familiar with the matter" in reporting that these cuts amount to roughly 20 percent of the Xbox division.</p>
<p>When combined with 1,600 newly announced layoffs across the rest of Microsoft, the company as a whole is letting go of just over 2 percent of its workforce. But <a href="https://www.seattletimes.com/business/microsoft/microsoft-cuts-4800-across-xbox-sales-divisions-redeploys-hundreds-more/">The Seattle Times reports</a> that Microsoft's total headcount has remained relatively stable thanks to other hiring.</p><p><a href="https://arstechnica.com/gaming/2026/07/the-incredible-shrinking-xbox-five-studios-3200-employees-let-go/">Read full article</a></p>
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# The incredible shrinking Xbox: Five studios, 3,200 employees let go
Source: [https://arstechnica.com/gaming/2026/07/the-incredible-shrinking-xbox-five-studios-3200-employees-let-go/](https://arstechnica.com/gaming/2026/07/the-incredible-shrinking-xbox-five-studios-3200-employees-let-go/)
Today’s announced layoffs also seem focused on reining in a large Xbox platform team, which Sharma said has grown “40% larger than they were at the start of this generation, even as our player base and playtime have declined\.” That could have an outsized impact on the development of Project Helix, the[recently announced hybrid console](https://arstechnica.com/gaming/2026/03/ms-exec-microsofts-next-console-will-play-xbox-and-pc-games/%22)that will also play generic PC games\.
## Hit the road, small studios
Amid these layoffs, Microsoft is also executing a massive reversal of its studio acquisition spree that[dates back to 2018](https://arstechnica.com/gaming/2018/06/microsoft-pushes-exclusives-premieres-at-pre-e3-press-conference/)\. Compulsion Games \(*We Happy Few*\) and Double Fine Productions \(*Psychonauts*\) will “return to management” and operate independently with full control of their intellectual property, Sharma writes\. Ninja Theory \(*Hellblade: Senua’s Sacrifice\)*and Undead Labs \(*State of Decay*\), meanwhile, have been purchased by other unnamed companies, while France’s Arkane Studios \(*Dishonored*,*Prey*\) is reviewing “potential strategic options” to operate outside of Xbox\.
Sharma bluntly admitted that these smaller studio acquisitions have been a financial mistake for Microsoft, resulting in a loss of “64 cents for every dollar we invested” in a “typical year\.” In recent years, Sharma writes that Xbox has “learned that we are not the best home for every type of studio” and that “it is neither possible nor desirable to own every great independent studio\.”
[](https://cdn.arstechnica.net/wp-content/uploads/2026/07/hellblade.jpg)
The era that brought games like*Hellblade: Senua’s Sacrifice*to Xbox is over\.
Credit: Arkane Studios
The era that brought games like*Hellblade: Senua’s Sacrifice*to Xbox is over\.Credit: Arkane Studios
At the same time, some of the larger game studios Microsoft has acquired are still apparently considered very desirable parts of its portfolio\. Mojang \(*Minecraft*\) and King \(*Candy Crush*\) will now report directly to Sharma, reflecting their outsize share of Microsoft’s monthly player base and the “critical geographic, demographic, and differentiation” they bring to the gaming division, Sharma writes\. And across Activision, Blizzard, Bethesda, and Xbox Game Studios, Sharma writes that Microsoft will be “shifting investment to focus on higher priority projects\.”
Microsoft is laying off 4,800 employees, with over 30% in Xbox, and spinning off four game studios (Double Fine, Compulsion Games, Ninja Theory, Undead Labs) to operate independently as part of a significant restructuring. The company is also considering selling or closing Arkane Studios amid budget issues.
Microsoft announces a major restructuring of Xbox, including layoffs of approximately 3,200 employees and transitioning four studios to independent management, citing unhealthy business margins and the need to reset content and platform strategies.
Microsoft's Xbox division is undergoing a major 'reset' with looming layoffs and studio closures, including the potential cancellation of a Blade game and shuttering of Arkane. The report also covers IO Interactive's layoffs after Microsoft pulled out of publishing its Project Fantasy RPG.
Microsoft laid off approximately 4,800 employees, primarily in Xbox and commercial sales, citing business transformation and the impact of AI on work processes.
Microsoft is planning a wave of layoffs and studio closures in its Xbox division, including canceling the Blade game and potentially shuttering Arkane Studios, as part of a cost-cutting reset under new CEO Asha Sharma.