Microsoft to cut 20% of division and drop several game studios.

Microsoft said Monday that it would lay off 1,600 Xbox employees now and cut another 1,250 roles over the next year as it prioritizes spending on artificial intelligence. Jae C. Hong- staff photographer.

SEATTLE - Microsoft said Monday that it was making major changes to its Xbox video game business, dropping several game studios and cutting its Xboxworkforce 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.

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 ledApple to raise prices: The AI boom has sharply increased the costs of memory chips used in its devices.

Sharma joined Xbox five months ago with a plan to reinvigorate Microsoft's video game business. In her letter to staff, she set an ambitious goal of doubling Xbox's reach to 1 billion daily users.

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.

The changes at the studios amount to a sharp about-face for Xbox, which has spent billions buying up developers. In 2023, Microsoft completed the largest acquisition in gaming history with the $69 billion purchase of Activision Blizzard, the hitmaker behind games such as Call of Duty and Candy Crush. Microsoft had made other acquisitions, including spending $7.5 billion to buy ZeniMax Media, which publishes series like Fallout and The Elder Scrolls.

In addition to the Xbox cuts, Microsoft's sales force was hit hard by the layoffs as the company continues to retool how it sells its AI products. Many of the sales cuts were outside the United States. Less than 1% of the company's workforce in its home state of Washington was let go.

Early last summer, Microsoft laid off about 15,000 employees. In April, the company offered its first-ever buyouts to thousands of long-serving workers. The buyouts were offered to about 7% of U.S. employees, and the company told investors that they would cost about $900 million. Coleman said more than 30% of the people eligible for the retirement package took Microsoft up on the offer.

In September 2024, Activision announced plans to layoff nearly 400 people in its in mobile gaming divisions in Santa Monica and Irvine, eliminating redundancies among its staff following its merger Microsoft. These layoffs came on top of 1,000 already made over the previous year by Activision, ranging from operations in Novato and Foster City in the Bay Area to Southern California offices, according to state filings with the Employment Development Department.