Xbox Division Lays Off 1,600 Employees, Spins Off Four Studios
The "Xbox Reset" marks a sharp reversal of Microsoft's acquisition strategy, spinning off major studios while cutting a fifth of the division's workforce to address profitability that Sharma described as far below industry standards.
Key Facts
- Approximately 1,600 Xbox employees were laid off on July 6, 2026, with a total of 3,200 set to be cut by the end of the fiscal year (June 2027).
- Four studios - Double Fine, Compulsion Games, Ninja Theory, and Undead Labs - regain independence as part of the restructuring.
- Xbox CEO Asha Sharma cited the division's profit margin at one-third to one-tenth of industry peers as a reason for the layoffs.
- Previously announced first-party games, including Ninja Theory's Senua and Undead Labs' State of Decay 3, will not be canceled and receive development funding.
- Kevin LaChapelle, a 37-year Microsoft veteran and lead engineer for Xbox backward compatibility and cloud gaming, was laid off.
Reporting from 3 sources: Automaton, GameBusiness.jp, Game Spark.
On July 6, 2026, Microsoft laid off approximately 1,600 employees in its Xbox division, the largest workforce reduction in the division's history. The company plans to cut a total of 3,200 Xbox positions by the end of the current fiscal year. Xbox CEO Asha Sharma sent an internal memo describing the move as an "Xbox Reset," citing the division's profit margin being one-third to one-tenth of industry peers and slowed growth relative to rising costs. Four studios acquired by Microsoft in recent years will regain independence: Double Fine and Compulsion Games under their founders' leadership, and Ninja Theory and Undead Labs through sales. The memo stated that previously announced first-party games will not be canceled, and Microsoft agreed to provide development funding for Ninja Theory's "Senua" and Undead Labs' "State of Decay 3." Arkane Studios has begun labor-management consultations about its future. Employees across Bethesda Game Studios, ZeniMax Online Studios, and Obsidian Entertainment also reported layoffs, with some saying they received no prior warning. The reductions follow earlier Microsoft gaming layoffs of 1,900 in 2024 and over 6,000 in May 2025. The layoffs on July 6 represent half of the 3,200 planned; the remaining cuts are expected within the fiscal year.
Microsoft Executive Vice President Amy Coleman's internal notice, obtained by The Verge, attributed the company-wide layoffs to changes in the IT industry and the impact of AI technology, though it stated that the affected roles are not being replaced by AI. Xbox CEO Asha Sharma's separate memo framed the layoffs and studio spin-offs as a "reset" rather than a contraction, saying the division will invest with a clearer vision. Employees affected included a Bethesda Game Studios associate quest designer who had received a raise notice just three days prior, and an Obsidian Entertainment art director with 21 years at the company. Kevin LaChapelle, a 37-year Microsoft veteran who led the Xbox backward compatibility program and later worked on cloud gaming, was also laid off; he posted on LinkedIn that leading the backward compatibility team was his fondest memory. Windows Central reported that many speculate the backward compatibility feature will be revamped for the next-generation Xbox "Project Helix," making LaChapelle's departure notable. Meanwhile, Mojang and King have been placed under Sharma's direct supervision. Bloomberg reporter Jason Schreier noted that even staff who escaped this round face anxiety, as Blizzard staff were told they would not know how the reorganization affects them until further communications. The layoffs also affected Bethesda Softworks significantly, and id Software reportedly may see its workforce halved.
- Double Fine: Regains independence under founder's leadership; known for Psychonauts series, Costume Quest, Keeper, Kiln
- Compulsion Games: Regains independence under founder's leadership; known for We Happy Few, South of Midnight
- Ninja Theory: Regains independence through sale; known for Hellblade series, DmC: Devil May Cry; development funding for new title Senua continues
- Undead Labs: Regains independence through sale; known for State of Decay series; development funding for State of Decay 3 continues
Synthesized by Yomimono from the 3 cited sources below, including Japanese-language reporting where cited, then editorially reviewed before publishing.