Microsoft has initiated the layoffs previously rumored by internal sources. The company will cut approximately 3200 positions from its Xbox division by fiscal year 2027. Xbox CEO Asha Sharma described the move as the 'most significant restructuring in Xbox history,' signaling a 'reset' of the entire business. Alongside the layoffs, four studios will leave Xbox, and France-based Arkane Lyon has entered a review of its future.

The layoffs represent roughly 20% of the Xbox division's workforce. About 1600 employees will be laid off immediately, with the remainder to be phased out over the next year. CEO Sharma noted that it would be difficult to complete all these changes in a single day.

In conjunction with the layoffs, several studios are parting ways with Xbox. Compulsion Games, developer of 'South of Midnight,' and Double Fine, led by Tim Schafer, will transition into independent studios, retaining their own IP and catalogs while receiving initial funding from Microsoft for their next projects. Ninja Theory, known for the 'Hellblade' series, and Undead Labs, developer of the 'State of Decay' series, will be transferred to new owners; both are reported to have secured funding to complete their respective titles, 'Senua' and 'State of Decay 3.' The acquiring parties have not yet been disclosed.

Additionally, France-based Arkane Lyon has begun a review of its future. Under local labor laws, the studio has initiated consultation procedures with its works council to discuss various options, including a sale, management buyout, or closure. Unlike the four studios confirmed to be leaving, Arkane's fate remains undecided, though it is effectively considered a fifth potential departure.

This decision marks one of the most significant shifts since 2018, when former Xbox head Phil Spencer announced the acquisition of five teams—Undead Labs, Ninja Theory, Compulsion Games, Playground Games, and The Initiative—promising they would have the resources for 'greater adventures.' Notably, The Initiative closed last year, and following this restructuring, Playground Games will be the only team from that group remaining under the Xbox umbrella.

The restructuring will focus on three areas: content portfolio, platform, and operations. Layoffs of varying scales will occur across Activision, Bethesda/ZeniMax, Blizzard, King, Mojang, and the broader Xbox Game Studios. Mojang and King, which boast the largest monthly active user bases, will be reorganized under Sharma's direct oversight. Within the platform organization, management layers—which reached up to 14 levels—will be reduced to five or fewer, with a goal of reaching three levels where possible. Furthermore, a new Chief Operating Officer (COO) position has been created to oversee the profit and loss of content, hardware, platform, and services, with Helen Chiang, a nearly 20-year Xbox veteran, promoted to the role.

Despite these adjustments, CEO Sharma emphasized that Xbox's direction is one of expansion, not contraction. Stating that these changes are 'for a bigger future, not a smaller one,' he announced that Xbox would continue to invest at record levels this year, but with greater focus, discipline, and clarity. While the total content investment for the next fiscal year is expected to remain at levels similar to the previous year, Xbox appears set to concentrate its resources on key franchises identified as growth drivers.