Xbox Leadership Team Shares “Hard Truths” Ahead of Potential Layoffs

Microsoft’s Xbox division is about to change how it operates as the new leadership team is planning a big “Xbox reset” over the next 100 days. That’s the spirit of a message Xbox CEO Asha Sharma and Chief Content Officer Matt Booty sent to all Xbox employees yesterday, before Bloomberg’s Jason Schreier reported that “significant layoffs” could be incoming.

In their message to Xbox employees yesterday, Sharma and Booty painted a pretty grim picture of the health of the Xbox business. “We will end this fiscal year at about a 3% accountability margin, down year-over-year. Excluding Activision Blizzard King, over the past five years, we have spent over $20 billion on ongoing investments in our content, platform, and hardware subsidy, but our annual revenue has declined nearly half a billion during that time. Going forward, this cannot continue,” the message reads.

The new leadership team also warned that Microsoft has been “impacted more greatly than many of our peers” by the hardware component crisis “due to the choices we made over the last half decade.” This isn’t explicitly said, but with Xbox console sales cratering, Microsoft may not have been in a great position to negotiate better memory and storage prices from its suppliers.

“We are currently unable to make as many consoles as players want to buy, and we need a new business model and partnerships for hardware as we remain committed to Helix,” the Xbox team said. This mirrors what Sharma said in a recent interview with Fortune, hinting that Xbox would “have to think very differently about storage and memory going forward.”

Sharma and Booty also acknowledged that Xbox owns “industry-defining franchises,” but has “not adequately funded them to compete and win.” The team also plans to rebuild its platform infrastructure, which hinders its “ability to move fast” and “increase the value” it delivers to Xbox gamers. “Going forward, we’ll evolve and rebuild our stack and look at capabilities across all of XBOX and potential M&A to help us win in hardware, PC, mobile, and streaming,” the team said yesterday.

The email to Xbox employees ended with a somewhat ominous message. “We won’t succeed by hiding hard truths, nor will we succeed by doing the same thing and expecting different results,” the team said.

According to Bloomberg’s Jason Schreier, Microsoft could announce major job cuts in July at the beginning of its new fiscal year. “Xbox is also planning to significantly slash budgets for marketing and some other areas of the business,” Schreier wrote, citing people familiar with the company’s strategy. In a separate report, The Verge’s Tom Warren wrote yesterday that “the cuts could even involve a studio closure, or changes to the Xbox studio lineup.”