Microsoft Lays Off 4,800 Employees, Sells Four Xbox Studios and Plans 20 Percent Gaming Workforce Cut by July 2027

Since Xbox CEO Asha Sharma warned of a coming 'reset' last week, the scale of that restructuring became concrete on July 6, 2026: Microsoft is laying off approximately 4,800 employees today, roughly 2.1 percent of its total global workforce, according to The Verge's Tom Warren.

Who Gets Cut

More than 30 percent of the 4,800 layoffs — around 1,600 people — are in the Xbox gaming division. The rest are concentrated in Microsoft's commercial sales organization. Amy Coleman, Microsoft's executive vice president and chief people officer, said in an internal memo that the cuts reflect a need to "adjust resources and roles and shift how we operate" as AI reshapes the company's business. Coleman was explicit on one point: "The roles eliminated today are not being replaced by AI."

This round follows the approximately 9,100 employees Microsoft cut a year ago. The company is not done. Sharma's internal memo states Microsoft plans to eliminate a total of around 20 percent of Xbox jobs by the end of the financial year in July 2027.

"I recognize that a year-long restructuring creates additional challenges," Sharma wrote. "Unfortunately, it is not possible to make all the necessary changes in a single day, and I wanted to be direct about the scale."

Four Studios Gone

Four Xbox game studios are being separated from Microsoft in today's restructuring, according to The Verge.

Double Fine — the studio behind Psychonauts, led by Tim Schafer — is returning to independence. Schafer will take it back as a founder-led indie.

Compulsion Games — known for We Happy Few and the recently released South of Midnight — is similarly reverting to founder Guillaume Provost as an independent studio.

Ninja Theory, makers of the Hellblade series, is being sold outright. Undead Labs, developers of the State of Decay franchise, is also being sold. Microsoft says agreements are in place to ensure Senua (the Hellblade protagonist's next game) and State of Decay 3 continue toward release under new ownership.

Mojang, which makes Minecraft, and King, the Candy Crush developer, will both now report directly to Sharma as part of the studio realignments.

Arkane's Fate Is Unresolved

A fifth studio, Arkane, is not being sold today but its future is actively under review. Arkane's Paris-based team is developing Blade, the Marvel vampire-hunter game, which has reportedly been delayed and is running over budget. Sharma confirmed that "Arkane's management is beginning required consultation with its Works Council to review potential strategic options" — a process mandated under French labor law that could take months. No outcome has been announced for Arkane or Blade as of today.

The Case for the Cuts

The strongest argument in Microsoft's favor is straightforward. Sharma's memo was blunt about the business: "We are operating at margins that are 3-10x lower than comparable platform and publishing businesses," and noted that "in a typical year, we lost 64 cents for every dollar we invested." Letting studios return to their founders rather than simply shutting them down preserves jobs and gives those teams a real shot at survival. The voluntary retirement program, which covered US employees whose age plus years of service totaled 70 or more, drew participation from more than 30 percent of eligible employees, Coleman noted, softening at least some of the forced cuts.

What Critics Will Argue

The legitimate counterargument is that Microsoft spent years acquiring these studios, pitching Xbox Game Pass as a creative umbrella that would let developers take risks without commercial pressure. Then it cut them loose the moment the business math stopped working. Developers at Double Fine, Compulsion, Ninja Theory, and Undead Labs accepted acquisition partly on the premise of corporate stability and resources. Whether the new ownership arrangements actually protect State of Decay 3 and the next Hellblade game, or whether those projects quietly die in transition, is a real and open question. No verified evidence in the sourced material confirms those titles will ship on any timeline.

Sharma's memo acknowledged the human cost directly: "These changes will directly affect people who have poured their creativity into building Xbox. Many joined us through acquisitions, while others were recruited here, or sought us out because they loved this industry and loved Xbox. Today's decisions do not reflect their talent or dedication."

What Comes Next

The immediate layoffs are effective today, but per Sharma's memo, Microsoft will continue reducing Xbox headcount through the end of its fiscal year in July 2027. This means employees at studios not named today are not in the clear. The situation at Arkane specifically will be determined by the Works Council consultation process in France, which has no fixed end date. The outcome for Blade depends entirely on what that review concludes.