Microsoft lays off thousands of Xbox employees, closes Game Studios

Microsoft said Monday that it is making major changes to its Xbox video game business, exiting several game studios and cutting the number of Xbox employees by 20 percent. The company said it will lay off 1,600 Xbox employees now and eliminate another 1,250 roles over the next year.

The initial Xbox layoffs are part of the 4,800 job cuts Microsoft announced Monday, totaling about 2 percent of the company’s workforce. He’s the latest Microsoft employee to spend as it invests tens of billions of dollars in infrastructure to build artificial intelligence.

Microsoft executives acknowledged that the company had misunderstood the economic challenges facing the video game industry.

“Our platform teams are 40 percent larger than they were at the start of this generation, even as our player base and playtime have decreased,” Xbox CEO Asha Sharma wrote in a letter to employees. “How we reset Xbox, we simplify.”

While Xbox is responsible for roughly 6 percent of Microsoft’s revenue, the brand has been one of the biggest and most influential forces in the video game industry since entering the console wars with Nintendo and Sony in 2001.

During the Covid-19 pandemic, video games have become a key consumer business for Microsoft. But since then, the company’s overwhelming priority has been investing in AI, while the video game division’s revenue has fallen.

Analysts said the company overspent on game acquisitions, underperformed with consumers and made a series of strategic mistakes. Microsoft is also facing a problem that recently drove Apple to raise prices: The AI ​​boom has sharply increased the cost of the memory chips used in its devices.

Ms Sharma joined Xbox five months ago with a plan to revive Microsoft’s video game business. In her letter to employees, she set an ambitious goal of doubling Xbox’s reach to a billion daily users.

“History is littered with companies that mistakenly see longevity as an inevitability,” Ms. Sharma wrote. “We won’t be one of them.

Instead of closing a number of critically acclaimed studio brands it owns, Xbox plans to give some studios ways to survive outside the company, potentially saving about 350 employees from layoffs.

Double Fine, which created Psychonauts series, a psychic spy comedy adventure, and Compulsion Games will become independent companies under their existing management and retain the franchises they developed under Microsoft, according to Xbox management. Undead Labs and Ninja Theory will be sold to undisclosed buyers. A fifth developer, Arkane Studios, is starting to explore other options.

There will be cuts at the remaining Xbox studios, including Activision Blizzard and ZeniMax Media, as well as across the brand’s platform teams.

The studio changes mark a sharp about-face for Xbox, which has spent billions buying developers. In 2023, Microsoft completed the largest acquisition in gaming history by buying Activision Blizzard, the hitmaker behind games like Call of Duty and Candy Crush, for $69 billion. Microsoft has made other acquisitions, including spending $7.5 billion to buy ZeniMax Media, which publishes series such as Fallout and The Elder Scrolls.

At the time, the hope was that the expanded catalog of titles would lead to more sales of consoles and software. But the Xbox Series X|S, a console released in 2020, was a commercial disappointment. In a typical year, Ms. Sharma said in her email to employees, Xbox lost 64 cents for every dollar it invested in game studios.

Microsoft chief executive Satya Nadella recently discussed the challenges facing the company’s video game business on “Hard Fork,” The New York Times’ technology podcast.

“We have to make this a sustainable business that provides what is fundamentally one of the best sources of entertainment,” Mr. Nadella said. Xbox gamers who stream their gameplay on YouTube have made more money from the games than Microsoft, he added.

Microsoft is among the big tech companies cutting jobs as it moves money into AI projects. In April, the company told investors it expects to spend about $190 billion on capital expenditures on data centers and other infrastructure this calendar year, more than 60 percent more than in 2025. But it said the company’s workforce is likely to shrink.

The ‘why’ is this: Our business is changing because the world around it is changing,” Amy Coleman, chief human resources officer, wrote to employees Monday. She said AI won’t replace jobs, but that technology is changing priorities and how people work.

Microsoft’s headcount surged during the pandemic, jumping 26 percent in two years to 221,000 by June 2022. It has barely budged since then. The company’s profit for this fiscal year is expected to jump 26 percent from a year earlier when the company reported results for the quarter that just ended.

In addition to the Xbox cuts, Microsoft’s sales force has been hit hard by the layoffs as the company continues to overhaul the way it sells its AI products. Many of the sales reductions were outside the United States. Less than 1 percent of the company’s workforce in its home state of Washington was laid off.

At the beginning of last summer, Microsoft laid off about 15,000 employees. In April, the company offered its first-ever buyouts to thousands of long-serving workers. The buyouts were offered to about 7 percent of U.S. employees, and the company told investors they would cost about $900 million. Ms Coleman said more than 30 per cent of people eligible for a pension package had accepted Microsoft’s offer.