How Xbox became the poster child for the video game industry's struggle

• Microsoft is cutting 3,200 jobs from its Xbox business as part of a broader companywide reduction.
• Xbox CEO Asha Sharma told employees the business is "not healthy."
• The video game unit made big bets that failed to drive enough growth, analysts told Business Insider.

The video game industry's problems are crystallizing inside Microsoft's Xbox.

A fresh round of layoffs at the tech giant's games division shows how those pressures are coming home to roost as costs rise and players devote more time to a just a handful of favorites. Plus, there are some Microsoft-specific problems to address.

"Our business today is not healthy," new Xbox CEO Asha Sharma wrote in an email announcing the layoffs, along with plans to divest four studios and make leadership changes — efforts all aimed at turning the gaming unit around. "We are operating at margins that are 3-10x lower than comparable platform and publishing businesses."

Sharma started the job in February, succeeding longtime Xbox chief Phil Spencer. She joined Microsoft in 2024 from Instacart and previously served as president of product in Microsoft's Core AI business.

The Xbox layoffs will immediately affect 1,600 roles, and be followed by another 1,600 cuts throughout fiscal 2027, Sharma said. The combined total will account for roughly 20% of the Xbox unit, and two-thirds of a companywide reduction also announced Monday, affecting 4,800 workers.

Some of the company's game employees told Business Insider they had seen cuts coming because the business had been struggling, but were surprised by their scale.

"Nobody was expecting it to be this bad," a laid-off employee from one Xbox studio said.

Harder to level up

The pandemic drove a boom in consumer spending for the games industry that has since faded, giving way to a steady drumbeat of layoffs.

Excluding Monday's Xbox cuts, an estimated 4,600 jobs at studios big and small have been eliminated so far this year across the gaming industry, compared with 5,300 in all of 2025 and 14,600 in 2024, according to an online tally of termination announcements and news reports compiled by Farhan Noor, a technical artist in California. Sony's PlayStation division has also had layoffs in recent years.

Meanwhile, the cost of making blockbuster games has ballooned as studios chase more ambitious releases with longer timelines and larger budgets. Some analysts estimate that "Grand Theft Auto VI," a highly anticipated game due out in November, cost developer Rockstar Games between $1 billion and $1.5 billion to make.

Unlike mobile gaming, the most lucrative corner of the industry, console gaming requires costly dedicated hardware, making it harder to reach casual players, said Wedbush Securities analyst Michael Pachter. The AI boom has added to the pressure by driving up demand for memory and storage, making consoles more expensive to build, he added.

For example, Microsoft has said it will raise Xbox console prices by $100 to $150, depending on the model, starting August 1. Sony made a similar move in April for its PlayStation 5 consoles. Both companies' current-generation consoles debuted in 2020, and console prices have historically fallen as a generation ages, not risen.

Players are also spending more hours inside a small number of long-running, regularly updated games such as Epic Games' "Fortnite," making it harder for new releases to break through, Pachter said. "Grand Theft Auto VI" could intensify that dynamic if players devote months or even years to it.

Consumer demand remains strong, with global industry revenue expected to grow 4.2% to this year to $260 billion, said Joost van Dreunen, CEO of the analytics firm and a professor at New York University's Stern School of Business.

"Game companies are expected to improve margins and, to achieve that, are cutting jobs," he said.

'Call of Duty' falls short

Microsoft's problems, however, go beyond pandemic-era overhiring and broader industry pressures. The company's Xbox consoles have long trailed Sony Group's PlayStation and Nintendo's Switch machines in sales, while its Game Pass subscription service has struggled to deliver meaningful growth.

Earlier in the decade, the company made two bold bets in hopes of making Game Pass more alluring. It acquired ZeniMax Media, the parent company of "Fallout" maker Bethesda Softworks, in 2021 for around $8 billion, and "Call of Duty" maker Activision Blizzard in 2023 for around $69 billion.

In Monday's layoff email, Sharma said that not all of the company's game studios are driving returns. In a typical year, she said, "we lost 64 cents for every dollar we invested."

Mike Hickey, an analyst at Benchmark, described the layoffs and changes that Sharma outlined as necessary.

"They overbuilt the organization," he said of Microsoft's Xbox business. "They added studios, employees, and management layers, all while growth was slowing. And they created a cost basis that's become difficult to support."

Microsoft's Game Pass service was supposed to help offset a slowing console business by turning Xbox into a subscription-driven platform stocked with its own blockbuster games, Hickey said.

The Activision deal was central to that bet, giving Microsoft control of "Call of Duty," one of the most successful game franchises of all time. But the first-person shooter series hasn't yet delivered the subscriber surge Microsoft hoped for, Hickey said, leaving Xbox with a larger content operation and not enough growth to support it.

"It's pretty clear the game creates more value as an $80 premium release than a subscriber acquisition tool that really hasn't delivered," he said.

Microsoft HR chief Amy Coleman said the jobs being cut at Xbox and elsewhere in the company are not being replaced by AI. Still, the layoffs come as the tech giant has been pouring billions of dollars into AI infrastructure, and as investors worry the technology could disrupt traditional software. Those concerns helped send Microsoft's stock down 19% in June, its worst monthly performance since the dot-com era.

To turn Xbox around, Sharma is now deviating from the unit's old playbook. By flattening management, spinning out some studios, and taking direct oversight of others, such as "Candy Crush" maker King, Pachter said she appears to be trying to bring more discipline to a sprawling games business.

"Asha is doing the right thing," he said. "Asha is far more interested in doing what's right than being popular."

Additional reporting by Tom Carter.