The story so far: On July 6, Microsoft’s Xbox CEO Asha Sharma shared a long post that she had sent to her staff, announcing widespread layoffs and an ambitious plan to “reset” the gaming division. Microsoft will cut 4,800 jobs, equal to about 2.1% of its workforce, while Xbox works to streamline games, staff operations, and platform teams in the face of what she calls the “most severe hardware crisis” in industry history.Ms. Sharma was named the Xbox CEO in February, and had earlier warned about Xbox’s lagging performance and falling revenue.Who is affected by the layoffs?Xbox will bear the weight of the layoffs, with Ms. Sharma confirming that a year-long restructuring will see around 1,600 jobs cut immediately. Throughout the 2027 fiscal year, the team is slated to undergo another 3,200 layoffs, apart from four studios leaving Xbox for new management. Ms. Sharma confirmed that none of the company’s first-party publicly announced games or projects are being cancelled in connection with the layoffs.Ms. Sharma further announced that the company was promoting Helen Chiang to the role of Chief Operating Officer, to report directly to the CEO.The CEO called the layoffs “painful”, acknowledged the impact of the restructuring on employees who built Xbox, and stressed the move did not reflect their talent or dedicationSeveral laid off employees took to LinkedIn to express their disappointment and sadness. While many sought support for themselves as well as their remaining co-workers, the layoffs did not come as a shock to most.That being said, the move heralds a difficult period ahead for the global gaming industry made up of both creators and players.Why are the layoffs taking place?The layoffs come as Microsoft acknowledges that its Xbox division is struggling, with Ms. Sharma admitting that the business was “not healthy” and that it was operating at margins that were 3-10x lower than comparable businesses. The goal is for the company to return to growth in 2027.As part of her plan to bring the gaming division back to glowing health, the Xbox CEO insisted on three “reset” actions that will shake up the content portfolio, platform teams, and operations.On the gaming front, Ms. Sharma said that Xbox was aggressively expanding its portfolio but highlighted studio-owner mismatches; she disclosed a loss of 64 cents for every dollar invested in a typical year, as the company moves to reduce some units while investing in higher priority projects. Xbox also committed to supporting independent creators by giving them open development tools and audiences.As for platform teams, the Xbox CEO emphasised simplicity; she criticised how work could sometimes move through 14 layers of management. As part of the new strategy, management layers will be reduced to five at most, or three, if possible. Other proposed strategies included a “cleaner” code base, shared services, and halving vendor spending.Even so, Ms. Sharma clarified that Xbox was not shrinking its scope or growth plans for the future.“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, adding, “History is full of companies that mistake longevity for inevitability. We will not be one of them.”But Xbox is not the only division that is struggling to secure returns on its investments.Zooming out, Microsoft has seen a drop of 23% in its shares in just the first six months of the year. Furthermore, Microsoft’s initial lead in the Gen AI race — boosted by its partnership with OpenAI — has floundered, as users express frustration with the integrated Copilot AI experience across the company’s hardware and software products.Are the layoffs due to AI?Recent layoffs at Big Tech companies including Meta, Amazon, and Google have sparked debates around AI potentially replacing laid off employees. However, some AI technologists have claimed that such logic can amount to “AI washing,” or the act of giving far too much credit to artificial intelligence instead of critiquing other factors and causes that trigger job cuts.As Microsoft announced its latest round of layoffs, Executive Vice President Amy Coleman addressed AI concerns. She stressed that AI would not replace the eliminated roles. At the same time, she admitted that AI was changing workflows and processes.Meanwhile, the Xbox CEO’s statement steered clear of AI as she focused instead on employee efficiency.This is an important email I sent today to all employees at XBOX:Team,We are beginning the most significant restructure in XBOX history. After careful consideration, I've made the difficult decision to reduce our team by approximately 3,200 throughout FY27. This will include…— ASHA (@asha_shar) July 6, 2026