The news is finally out. Microsoft is laying off thousands of people from its Xbox division and losing four game studios from its roster. Those studios are Double Fine, Compulsion Games, Ninja Theory and Undead Labs, with Arkane Lyon in talks for being removed.

Importantly, those studios aren't necessarily closing. Keeper and Psychonauts developer Double Fine, and South of Midnight developer Compulsion "will return to management and transition to independent studios with their IP, catalogue, and runway for the next games", Xbox leader Asha Sharma said in an email to staff, published on Xbox Wire.

Hellblade developer Ninja Theory and State of Decay developer Undead Labs, meanwhile, "have entered terms to join new ownership with funding to complete and grow Senua and State of Decay 3". Deathloop and Dishonored developer Arkane "is beginning required consultation with its Works Council to review potential strategic options".

Microsoft is also laying off people and "shifting investment to focus on higher priority projects" across Activision, Blizzard, Bethesda/Zenimax, Microsoft Game Studios, Mojang and King. "None of our first party publicly announced games or projects are being cancelled as part of these reductions," Sharma clarified.

As a result of this restructuring, a total of 3200 jobs will be lost, with 1600 people losing their jobs today and a further 1600 losing their jobs over the course of financial year 2027, which ends 30th June 2027.

"I know this is painful," Sharma said. "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."

"History is full of companies that mistake longevity for inevitability. We will not be one of them" -Asha Sharma

Sharma described the Xbox business today as "not healthy", and said it was operating at margins three-to-10 times lower than comparable platform and publishing businesses. She said Xbox entered this generation with a smaller installed base and higher cost structure, whatever that means, and the plan for beating this was betting on Game Pass, multi-platform and a broader portfolio of "content".

"While those businesses have created meaningful value, they did not grow at the pace we expected," she said. "As that happened, our core business weakened, and we added more teams, more investment, and more time, hoping for a better outcome. And now the industry is facing the most severe hardware crisis in its history. We must reset Xbox."

Specifically on the topic of the company's studio portfolio, Sharma said there was "aggressive" expansion in 2018 but Xbox now finds itself competing with large publishers, smaller independent studios and more games than ever before. "It is neither possible nor desirable to own every great independent studio. We have also learned that we are not the best home for every type of studio; in a typical year, we lost 64 cents for every dollar we invested. As we reset Xbox, we will help independent creators succeed by providing open development tools and audiences to realise their vision."

"This year, we'll invest as much in Xbox as we ever have" -Asha Sharma

The layoffs will also remove what sounds like a thick layer of middle-management at Xbox. "Today, in some parts of the company, work passes through as many as 14 layers of management," Sharma said. "Our platform teams are 40 percent larger than they were at the start of this generation, even as our player base and playtime have declined. That complexity has slowed decisions, blurred accountability, and made it harder to deliver for players. As we reset Xbox, we will simplify." Sharma talked of a "flatter" organisation with more streamlined tools, cleaner code bases and shared services. There's no mention of generative AI.

Xbox is also installing a chief operating officer for the first time, apparently, to oversee everything, and that person will be Helen Chiang, who has spent nearly 20 years working at Xbox, on Xbox Live a long time ago and more recently Minecraft. "She will bring our businesses together under one operating model," Sharma said. 17-year Xbox veteran Dave McCarthy will retire.

"These changes are about a bigger future for Xbox, not a smaller one," Sharma said in closing. "The next decade of gaming will be larger, more global, and more creative than anything we've seen before. This year, we'll invest as much in Xbox as we ever have, but we'll invest with greater focus, greater discipline, and greater clarity, all in service of making Xbox where the world plays and creates.

"I want Xbox to be one of the few companies that entertains more than a billion people each day and gives everyone the opportunity to create and connect. I know we can achieve this goal. Xbox has many of the most beloved franchises in entertainment history, talented studios around the world, and we will return to growth in 2027.

"History is full of companies that mistake longevity for inevitability. We will not be one of them."