All the Things She Said, Some of the Things She Didn’t ⭐

It’s too early, I know, and there are more details to learn, but I’ve been mulling over the Xbox layoffs since they were first announced. And I just can’t wait on this.

I can’t imagine you missed it, but Microsoft told employees Monday that the software giant was laying off 4,800 of them, or about 2.1 percent of the workforce, some immediately and some before the end of the current fiscal year, or by June 30, 2027. This tracks with recent rumors. And the company confirmed that the layoffs were not as bad as they would have been otherwise because its first-ever buyout offer to long-serving U.S.-based employees earlier this year was more successful than anticipated. About 30 percent of the 9,000-ish employees who were eligible accepted it, so it’s possible that the total laid off this week would have been closer to 8,000.

By comparison, Microsoft laid off about 15,000 employees at this time a year ago. So this is “good” news in the sense that, while these layoffs were anticipated by months, they were less voluminous than last year’s layoffs. And, as important, they were handled much better. You may recall the tone-deaf memo that CEO Satya Nadella wrote a year ago to try and explain why they had just endured several chaotic rounds of layoffs in the first half of 2025.

The “why” of these layoffs is the same this year as last: Despite explicitly telling employees that AI is not to blame, it is, just as it was a year ago. But that’s not how it was described. Microsoft chief people office (gross) Amy Coleman informed employees that Microsoft’s business is changing because “the way technology is built, deployed, and used is transforming faster than at any point,” Microsoft’s customers’ needs are shifting, and “the business models that serve them are shifting.” This part bothers me. “Companies don’t get to choose whether their industry changes; they only get to choose whether they change with it,” she writes, as if AI just happened to Microsoft. But it didn’t. Microsoft is the company that jump-started this insane AI era, please remember, and their sole innovation thus far, the only thing it’s done in 20 years that others have copied, has been overspending on AI infrastructure to the degree that it’s endangering the economy.

So there’s that. But I want to focus on Xbox.

Xbox is unique inside Microsoft, and it has been uniquely impacted by this round of layoffs and this sudden need to rein in costs at a time when spending costs are exploding exponentially elsewhere at the company. Fully 3,200 of the 4,800 role reductions occurring at Microsoft are happening within Xbox. Put another way, two out of every three employees being laid off at Microsoft worked in Xbox. (It’s actually worse than that; see below.)

Xbox began as a traditional hardware console business. Microsoft added the Xbox Live only service a year later, saw its biggest success with the Xbox 360, but only because Sony was a year late to market and horribly expensive at launch, and that was hobbled by the Red Ring of Death regardless and was never going to be profitable. The Xbox One was, incredibly, a disaster, in part because Microsoft pulled a Sony and overpriced the initial release. Xbox pivoted to subscription services with Xbox Game Pass, but the Xbox Series X|S, somehow, and even more incredibly, was even less successful than its predecessor. So Xbox went big and acquired Activision Blizzard to bolster the business and transform Xbox into the world’s second biggest game publisher. A winning strategy that continues to outrage a vocal minority of fans and will only work if Microsoft finally pulls the plug on in-house hardware.

Xbox CEO Asha Sharma inherited a mess not of her making from a man who did everything he could to save this business, but she’s been warning of a reset for months, so this week’s news wasn’t entirely unexpected. Like many, I’ve been waiting for details, and her memo to employees, so much better than Ms. Coleman’s, does reveal a few crucial bits of hard data and some vaguer news, but it still leaves a lot unsaid. This is, I think, tied to the decade-plus of Microsoft generally and Xbox specifically slowly walking back the transparency that used to define the company’s annual reports.

But not these days. Microsoft hasn’t revealed a console unit sales figure since the earliest days of the Xbox One in 2013. And it hasn’t provided an Xbox Game Pass subscriber member number since February 2024, when there were 34 million paying subscribers. (The Wall Street Journal published a story today about Game Pass numbers; more on that below.)

So let’s step through what we learned, or at least what we were told.

Xbox has begun the most significant restructuring in its history. Given the history I laid out above, that feels impossible. Microsoft spent $68 billion in upfront costs when it acquired Activision Blizzard in late 2023, but that’s just the tip of that cost iceberg, and it has spent an untold tens of billions in costs related to this acquisition and the difficult process of combining the businesses since then.

The Xbox business is not healthy. This is no surprise given all the bad news in every single Microsoft quarterly report over the past several years. But here, Sharma provides some fascinating details: Xbox’s margins are 3 to 10 times lower than comparable platform and publishing businesses, which speaks to my many comments about the lack of profitability here. The installed base at the time of the Xbox Series X|S was smaller and had a higher cost structure, presumably when compared to its predecessor; this makes sense, as there were two consoles at launch, one premium priced. And its bet on Game Pass has not paid off. As all that was happening, Xbox took on the exponential costs of Activision Blizzard, “hoping for a better outcome” that did not emerge. And now we have the component crisis.

Xbox will reset its content portfolio. This portfolio has expanded dramatically since 2018, not just because of Activision Blizzard, but also thanks to the 2021 Zenimax/Bethesda acquisition that brought Bethesda Game Studios, id Software, Arkane Studios, MachineGames, and other studios in house. Xbox is “now competing not only with the largest publishers, but also with smaller independent studios,” which is not ideal, and it has come to understand that it is not the best home for every type of studio.” Here, we get another detail: For every dollar Microsoft invested in game studios during this period, it has lost 64 cents. This leads to…

Four studios are leaving Xbox. Here, the outcomes all look good and match what I’ve been predicting (or at least hoping): Compulsion Games and Double Fine will simply leave Xbox and take their games and IP with them, and Ninja Theory and Undead Labs will join unstated new ownership with “funding to complete and grow” the new games they just announced. And a fifth studio, Arkane, is consulting about potential strategic options. The good news? “None of the first-party publicly announced games or projects are being cancelled as part of these reductions.”

Mojang and King will now report directly to Sharma. Mojang is the maker of Minecraft and it had been running as an independent business since Microsoft acquired it in 2014. King is the mobile games part of Activision Blizzard and this business appears to have been coasting on past successes for many years. But here’s the interesting bit: These two businesses are the “largest [within Xbox] by monthly active players.” And both are now considered platforms, which makes them different … somehow. “They bring critical geographic, demographic, and differentiation to Xbox,” Sharma wrote.

Xbox is reducing management layers. This is a classic reorganization goal and the type of thing that often needs to happen after decades of steady employee and management creep. Sharma says that some decisions now “pass through as many as 14 layers of management” and that its platform teams are 40 percent larger than they were when the Xbox Series X|S launched, even though the Xbox “player base and playtime have declined.” “That complexity has slowed decisions, blurred accountability, and made it harder to deliver for players,” she notes. “We will simplify.” There will be no more than 5 management layers going forward, and many times it will be as little as three.

Xbox is going to have a single operating model with accountability. This feels like the Satya Nadella requirement that each business within Microsoft demonstrate that it is profitable or has a way to reach profitability. Xbox is creating a new Chief Operating Officer role with “end-to-end profit and loss responsibility across content, hardware, platform, and services.” That person will report directly to Sharma, who reports directly to Nadella. And that person will “make sure [Xbox] makes clear investment decisions, learn from [its] successes and failures, and hold [the business] accountable for results.”

Xbox is cutting costs in other ways. In addition to lowering the employee count, cutting loose studios that don’t fit, and reducing management, Xbox will “streamline how [it] works across [its] tools, with a cleaner code base, shared services, and 50 percent reduced vendor spend.” I don’t mean to beat this to death, but despite the criticisms, merging the Xbox console platform with Windows always made sense, and this hints that that work continues and is core to what emerges on the other side of the reset. Additionally, Xbox will apparently make developing for the platform cheaper too, which makes sense given the above. It will help “independent creators succeed by providing open development tools and audiences to realize their vision.”

Xbox is shifting investments to higher-priority projects. There is literally no detail or other information about what that even means.

The future. Xbox is changing so it can become bigger, not so it will be smaller, Sharma says. Xbox will invest as much in the business as it ever has, whatever that means, but will do so “with greater focus, greater discipline, and greater clarity.” Whatever that means. “History is full of companies that mistake longevity for inevitability,” the memo concludes. “We will not be one of them.”

OK. But there is a lot left unsaid there, too.

The memo doesn’t mention the word “console” even once, and the word “hardware” comes up just once in that context. I feel that continuing with first-party consoles is a huge mistake and it is a proven profitability killer. I’m curious if the plans change, one outcome being Microsoft farming out hardware production to companies better suited for that.

Tied to that, The memo doesn’t directly address cross-platform game publishing, which is the real and biggest business of Xbox.

The memo mentions Game Pass just once, and then only as it being an unhealthy part of the business and a decision made by an earlier leadership team. But as noted, the WSJ reported that there are only 30 million paying Game Pass subscribers now. That’s lower than the 34 million members it announced in February 2024, and much lower than the 77 million that the publication says Xbox originally projected for this year. Some of that 4 million drop is likely tied to last year’s price hikes, but the lack of growth in 2+ years is troubling.

Also not said in the memo, the employees leaving with those four studios are not part of the 3,200 job losses. So another 350 people will exit Xbox with those studios, according to separate reports in The New York Times and the WSJ. Put another way, Xbox will lose at least 3550 employees this year, and probably more if that fifth studio exits too.

I suspect we will learn more in the coming days and weeks, but as noted, I just couldn’t wait on this.