The move comes as part of Microsoft's broader AI-led workforce reduction, under which the tech giant is cutting around 4,800 jobs across the company. Xbox is expected to bear the biggest impact.

1,600 employees to be laid off immediately

In an email to employees, Xbox Chief Executive Officer Asha Sharma said 1,600 workers will be laid off on Monday, while the remaining job cuts will take place during fiscal year 2027.

The company will also divest four gaming studios and is preparing to part ways with another as part of its restructuring.

"Our business today is not healthy. We are operating at margins that are 3-10x lower than comparable platform and publishing businesses," Sharma wrote in the email, adding that the decision "does not reflect the talent and dedication" of affected employees.

'We must reset Xbox'

Calling the current situation unsustainable, Sharma said the gaming industry is facing one of its "most severe hardware crises" and stressed the need for a complete overhaul.

"We must reset Xbox," she said.

According to Sharma, the company has been losing 64 cents for every dollar it invests annually, making significant structural changes unavoidable.

Flatter organisation, fewer managers

As part of the overhaul, Xbox will simplify its organisational structure by reducing management layers from as many as 14 to no more than five, and where possible, just three.

"We will deliver success through a flatter organisation," Sharma said, noting that excessive bureaucracy has slowed decision-making across the company.

The gaming giant will also reduce vendor spending by 50 per cent and streamline internal tools and processes to improve efficiency.

Focus shifts to platform and content

Sharma outlined three priorities for Xbox's transformation—revamping its content portfolio, strengthening its platform and simplifying operations.

She said Xbox plans to expand support for independent game developers by providing open development tools and broader access to audiences.

Meanwhile, Mojang and King—two of Microsoft's biggest gaming studios—will now report directly to Sharma.

"These two studios have increasingly become platforms and are our largest by monthly active players. They bring critical geographic, demographic and differentiation to Xbox," she said.

New COO appointed

Sharma also announced the promotion of Xbox veteran Helen Chiang as the company's first Chief Operating Officer.

Chiang will oversee profit-and-loss responsibility across content, hardware, platform and services, reporting directly to the CEO.

"For the first time, we are establishing a Chief Operating Officer with end-to-end P&L responsibility across content, hardware, platform, and services," Sharma said.

She added that the new structure would enable Xbox to make clearer investment decisions while improving accountability.

Microsoft doubles down on AI

The Xbox layoffs come amid Microsoft's aggressive push into artificial intelligence, with the company investing heavily in AI infrastructure while seeking to improve efficiency across its businesses.

Despite the sweeping cuts, Sharma said the long-term goal remains growth.

"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," she said.