Microsoft slashes Xbox workforce amid underperforming role in global AI race

Microsoft announced it will cut 4,800 jobs globally, including a 20% reduction at its Xbox division, as the company shifts investment toward artificial intelligence. Xbox CEO Asha Sharma cited declining revenue and thin margins, while Microsoft lags behind rivals in AI development, with its stock down 17% this year.

- Microsoft announces Xbox will reduce its workforce by 20%. - Overall, the software giant is cutting its global workforce by 4,800 employees. - The cuts come as Microsoft drastically increases investment in AI development. About a month ago, freshly installed Xbox CEO Asha Sharma sent out a notice https://news.xbox.com/en-us/2026/06/10/next-100-days-xbox-reset/ to employees saying that the company’s $20 billion in investments over the past five years not including a nearly $70 billion acquisition of hotshot game developer Activision Blizzard , razor-thin profit margins and revenues that have declined by $500 million over the same period represent a trend that “cannot continue”. On Monday, the Microsoft-owned company that’s celebrating the 25th anniversary of its namesake gaming console later this year announced layoffs aiming to reduce global employee rolls by 20% in the next two years. Those cuts include 1,600 positions announced now and plans for approximately 1,600 further reductions in the coming year. Companywide, Microsoft announced 4,800 layoffs, representing just over 2% of the software giant’s overall workforce. In an email https://news.xbox.com/en-us/2026/07/06/resetting-xbox/ to employees, Sharma said the reductions were part of an Xbox restructuring effort that launches in the face of challenges within the gaming industry alongside Microsoft’s rising level of investments in artificial intelligence development and underperforming role in the race among tech giants to lead out in the booming AI sector. “We are beginning the most significant restructure in Xbox history,” Sharma wrote. “After careful consideration, I’ve made the difficult decision to reduce our team by approximately 3,200 throughout FY27. This will include approximately 1,600 role eliminations today, and in addition, four studios will leave Xbox to new management.” How AI is impacting tech layoffs A New York Times https://www.nytimes.com/2026/07/06/technology/microsoft-xbox-layoffs-ai.html report notes Microsoft is among a number of big technology companies making workforce reductions while pushing more money toward AI-related endeavors. In April, the company told investors that it expected to spend about $190 billion on capital expenditures for data centers and other infrastructure this calendar year, up more than 60% from 2025, per the Times. But the company’s work force, it said, was likely to shrink. “The ‘why’ is this: Our business is changing because the world around it is changing,” Microsoft chief people officer Amy Coleman wrote in an email https://blogs.microsoft.com/blog/2026/07/06/the-latest-in-our-company-transformation/ to employees Monday. “The way technology is built, deployed, and used is transforming faster than at any point in my time here.” Microsoft, which widely promotes its Copilot technology, has lagged behind internet rivals in creating AI tools and services that resonate with users, according to a report from CNBC https://www.cnbc.com/2026/05/22/microsoft-was-positioned-to-win-in-ai-coding-outages-got-in-the-way.html :~:text=Microsoft%2C%20which%20widely%20promotes%20its,all%20of%20its%20megacap%20peers. . That helps explain why its stock price is down 17% this year, trailing all of its megacap peers, including Apple, Amazon and Meta. Microsoft’s broader transformation is one being driven by AI, Coleman notes in her email, while both downplaying and underscoring AI’s role in the layoff decisions. “I also want to be direct that the roles eliminated today are not being replaced by AI,” Coleman wrote. “At the same time, what is true is that AI is changing how work gets done.” In an extensive report on the challenges facing Xbox, Seattle-based tech industry website GeekWire https://www.geekwire.com/2026/xbox-at-a-crossroads-25-years-later-microsoft-is-done-playing-around/ :~:text=Revenue%20is%20shrinking.,investing%20more%20to%20earn%20less. noted Microsoft CEO Satya Nadella has been bluntly acknowledging the need for a fundamental reset after spending years subsidizing Xbox rather than profiting from it. The report notes that videos and livestreams of people playing Xbox games posted to YouTube generate more money than Microsoft makes from the games themselves, according to comments Nadella made during an appearance on the Hard Fork podcast https://www.geekwire.com/2026/microsoft-ceo-satya-nadella-on-xbox-we-have-to-turn-this-into-a-sustainable-business/ . “No one can accuse Microsoft of not having invested for the last 25 years,” Nadella said. “And now we have to turn this into a sustainable business.” But some industry watchers have suggested that Microsoft’s quarter-century in the electronic gaming business should rightfully be coming to a close rather than setting course for yet another redo. “This is not a business Microsoft needs to be in, or should be in,” DA Davidson analyst Gil Luria told CNBC https://www.cnbc.com/2026/07/06/microsoft-cuts-2point1percent-of-employees-as-xbox-unit-plans-to-spin-studios.html , referring to Xbox. “It is very possible that they will spin it off at some point.”