Microsoft plans major Xbox layoffs, cuts marketing budgets next month

Microsoft’s Xbox division was preparing major layoffs next month, along with significant cuts to marketing and other budgets, in a move that would mark the first major restructuring under gaming chief Asha Sharma. The changes were expected shortly after Microsoft closed its fiscal year on June 30, putting the shake-up in early July and signaling a tighter phase for a business that has spent heavily but still struggled to produce the growth investors wanted.

The timing also made the move an early test of Sharma’s leadership. Microsoft named her CEO of Microsoft Gaming on February 20, 2026, after Phil Spencer decided to retire following 38 years at the company. At the time, Microsoft said Xbox had more than 500 million monthly active users and that Microsoft Gaming spanned nearly 40 studios across Xbox, Bethesda, Activision Blizzard and King, a scale that now faces sharper scrutiny as the company trims spending.

The pressure comes from a gaming business whose economics have weakened even as Microsoft’s broader company remains highly profitable. Bloomberg-cited internal material said Xbox’s accountability margin had fallen to 3%, and that the division had spent more than $20 billion on content, platforms and hardware subsidies over the past five years while annual revenue declined by nearly half a billion. Microsoft’s fiscal 2025 results showed gaming revenue rose 9% year over year to $2.0 billion, but the mix was uneven: Xbox content and services revenue increased 16%, helped by the Activision Blizzard acquisition and Xbox Game Pass, while Xbox hardware revenue fell 25% as fewer consoles were sold.

That split helps explain why the cuts matter beyond headcount. Xbox is increasingly dependent on subscriptions, software and recurring services at a time when console sales are softer and blockbuster game launches are harder to guarantee. Lower marketing budgets could mean less muscle behind new releases, while layoffs and tighter overhead could force studios to do more with less, with real consequences for development timelines, team morale and the pace of new content.

Microsoft’s broader numbers show the company can absorb setbacks in gaming while still posting strong results. Its fiscal 2025 annual report showed revenue of $281.7 billion and operating income of $128.5 billion. But the planned Xbox overhaul suggests Redmond is no longer willing to treat gaming as an open-ended investment, and may be choosing margin discipline, publishing efficiency and subscriptions over the old playbook of scale at any cost.