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Microsoft said Monday it would cut 4,800 jobs, or about 2.1 per cent of its global workforce, as part of a restructuring that includes an overhaul of its Xbox gaming business and the divestment of up to five studios. The company is looking to boost returns after years of heavy investment in the division.
The restructuring of the gaming division will involve 3,200 job cuts, including laying off 1,600 employees on Monday.
Despite spending tens of billions of dollars to expand Xbox, including through its blockbuster acquisition of Activision Blizzard, Microsoft has struggled to narrow the gap with Sony’s PlayStation and Nintendo, prompting a broader rethink of its gaming business.
The company has increasingly shifted its strategy toward distributing its games across more platforms rather than relying on console-exclusive titles to drive Xbox hardware sales.
The Xbox restructuring will involve the divestment of four studios, the division’s new head, Asha Sharma, said in a note to employees.
Montreal-based South of Midnight producer Compulsion Games and Psychonauts maker Double Fine Productions will become independent studios. Ninja Theory and Undead Labs will be spun off to develop the upcoming Senua and State of Decay 3 games, respectively, Sharma said.
Management at Arkane Studios, which developed Dishonored and is working on a game based on Marvel Comics character Blade, has begun consultations with its union in France to review options, she added.
“Our business today is not healthy,” Sharma said in the memo. “We are operating at margins that are three to 10 times lower than comparable platform and publishing businesses.”
In a statement posted on social media, Compulsion Games said it would retain the rights to its games, including South of Midnight.
“We’re grateful for the years we spent with Xbox, for the support they provided our team, and for the opportunity to bring these games to players around the world,” it said. “Our immediate priority is to support our team throughout this transition period.”
AI-driven efficiency push
Big Tech’s historic spending on AI, expected to exceed $700 billion US this year, is increasing pressure on companies to show returns from the technology and offset the rising cost of deploying it across their businesses. Amazon and Meta have also laid off thousands of employees this year.
Microsoft’s chief people officer Amy Coleman, however, told employees in a memo that “the roles eliminated today are not being replaced by AI.”
“At the same time, what is true is that AI is changing how work gets done.”
Tech giants Apple and Microsoft are increasing prices on laptops and game consoles due to a global supply issue with memory chips. Artificial intelligence companies are snapping up the essential components, causing prices to climb.
The targeted cuts “read more like portfolio reallocation and operating discipline than a fresh catalyst for the stock,” said Parth Talsania, CEO of Equisights Research, an investment research firm.
“In the near term, the market is likely to reward Microsoft less for headcount reductions and more for evidence that AI monetization is scaling faster than AI-related costs.”
Microsoft shares were down 1.4 per cent Monday after falling nearly 23 per cent in the first six months of 2026, their worst first-half performance since 2022.
Earlier this year, the software giant offered voluntary buyouts to about seven per cent of its U.S. workforce, or approximately 9,000 employees. Microsoft often cuts jobs near the end of its fiscal year in June as it sets spending plans for the new year.
“Microsoft has been managing down its workforce in order to pay for its AI investments. By keeping its headcount down they have been able to accelerate revenue growth while maintaining the same margins,” said Gil Luria, managing director of U.S.-based investment advice firm D.A. Davidson.
Booming demand for AI has powered growth at Microsoft’s Azure cloud-computing business, which was the exclusive seller of OpenAI’s models until April. But the mounting cost of building data centres to run those services is squeezing the company’s cash flow.
Microsoft, which is expected to report its results later this month, forecast in April that quarterly Azure sales would exceed Wall Street estimates. However, it also projected $190 billion US in spending for 2026, far exceeding expectations.
AI tools that can increasingly automate routine business tasks have also emerged as a threat to Microsoft’s lucrative software business. Meanwhile, a surge in memory chip prices driven by data centre demand has forced Microsoft to raise Xbox console prices at a time when demand for the console was already soft.
