SEATTLE — Microsoft said Monday that it was making major changes to its Xbox video game business, dropping several game studios and cutting its Xbox workforce by 20%. The company said it would lay off 1,600 Xbox employees now and cut another 1,250 roles over the next year.

The initial Xbox layoffs are part of 4,800 job cuts that Microsoft announced Monday, a total that accounts for roughly 2% of the company’s workforce. It is Microsoft’s latest employee culling as it plows tens of billions of dollars into the infrastructure for building artificial intelligence.

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

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

While Xbox is responsible for about 6% of Microsoft’s revenue, the brand has been one of the largest and most influential forces in the video game industry since it entered the console wars with Nintendo and Sony in 2001.

During the COVID-19 pandemic, video games became a crucial consumer business for Microsoft. But since then, the company’s overwhelming priority has been investing in AI, while the video game division’s sales have dropped.

Analysts said the company had overspent on game acquisitions, underperformed with consumers and made a series of strategic blunders. Microsoft also faces a problem that recently led Apple to raise prices: The AI boom has sharply increased the costs of memory chips used in its devices.

Instead of shuttering a number of critically acclaimed studio brands that it owns, Xbox plans to provide ways for some studios to survive outside the company, potentially sparing about 350 employees from layoffs.

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

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

—

This article originally appeared in The New York Times.

By Karen Weise and Zachary Small
c. 2026 The New York Times Company