Microsoft's stock had already dropped 19% this year. Investors are worried that generative AI could disrupt large parts of enterprise software while Microsoft's own AI products have not yet achieved significant success. Now the tech giant is cutting jobs in its gaming and hardware businesses, even while its cloud and LinkedIn units grow. Revenue from Windows, Surface, and Xbox is shrinking.
The Layoff Details
The Xbox division takes the biggest hit. The company's share price dropped 1% on the announcement day - a small move compared to the 19% decline for the year.
Xbox Overhaul and Studio Spinoffs
Xbox CEO Asha Sharma wrote an email to staff explaining the cuts. She said, "I recognize that a year-long restructuring creates additional challenges. Unfortunately, it is not possible to make all the necessary changes in a single day." She also promised, "We will return to growth in 2027."
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Microsoft is spinning off four game studios it previously owned. Compulsion Games and Double Fine Productions will become independent again. Ninja Theory and Undead Labs are in the process of being taken over by new owners. Double Fine posted on X: "We're thankful to everyone at Xbox for seven great years together, and for working with us to reach an outcome which preserves our history and culture, and returns ownership of our games to us."
Another studio, Arkane Studios in France, is in talks with its works council about strategic options.
Analyst Gil Luria of DA Davidson said on CNBC: "This is not a business Microsoft needs to be in, or should be in. It is very possible that they will spin it off at some point."
These spinoffs mark a significant shift for Microsoft's gaming strategy. The company acquired many of these studios in recent years to bolster its first‑party game lineup, but now appears to be retreating from direct ownership in favor of a leaner approach. The decision also reflects the broader industry trend of major publishers reassessing their studio portfolios amidst rising development costs.
Broader Cost-Cutting Moves
The layoffs are part of a larger cost-cutting effort at Microsoft. Last year, the company cut 9,000 jobs. In April, it introduced a voluntary retirement program. More than one-third of eligible U.S. employees accepted it.
Microsoft's chief people officer, Amy Coleman, a 27-year company veteran, wrote the company-wide message about the cuts. She said, "The way technology is built, deployed, and used is transforming faster than at any point in my time here." She also noted that AI is changing work. "Some of the tasks we do every day can now be automated, and that means we all need to keep learning, keep building new skills, and keep adapting as the work evolves."
What to Watch
The four spun-off studios will operate independently, and Arkane's fate is still undecided. Some analysts believe Microsoft could eventually spin off the entire Xbox unit. The coming months will show whether these cuts and spinoffs can restore growth to Microsoft's gaming business.
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