Xbox hits reset

Despite spending billions on AI, Microsoft is the worst-performing member of the Magnificent Seven this year, with shares down 20% in 2026 as investors question its AI strategy. Now, the software giant is trying to turn things around by making big changes to one of its weakest divisions: Xbox.

“Our business today is not healthy,” Xbox CEO Asha Sharma wrote in an internal email this morning. That’s a bit of an understatement: Xbox revenue fell 5% year over year in the March quarter, and its profit margin shrank to just 3% in the fiscal year ended June, according to the Wall Street Journal.

That’s why Xbox is cutting 3,200 jobs—roughly 20% of its workforce—through fiscal 2027, with 1,600 employees leaving today and the remainder departing over the next year. The company will also divest four game studios and begin separating from a fifth, focusing more of its spending on its biggest franchises, including Minecraft, Candy Crush, and Fallout.

Microsoft shares fell 0.96% today.

What went wrong

“We now find ourselves competing not only with the largest publishers, but also with smaller independent studios. It is neither possible nor desirable to own every great independent studio,” Sharma noted. “In a typical year, we lost 64 cents for every dollar we invested.”

That declaration is a stark departure from the company’s previous strategy of buying every gaming studio in sight. Between 2014 and 2022, Microsoft spent tens of billions of dollars acquiring companies like Mojang, Obsidian Studios, and Activision Blizzard in an effort to build out its Game Pass streaming service. The company wanted it to be the “Netflix of games,” but instead, it’s looking more like the Quibi of games.

“To grow, we bet 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,” Sharma admitted. “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.”

Beyond Xbox

Sharma isn’t exaggerating. AI’s insatiable demand for memory chips has sent component costs soaring, squeezing console makers across the industry. As a result, Microsoft is preparing to jack up Xbox prices another $100 to $150 in August—after having already raised prices twice last year—while Nintendo is expected to increase Switch 2 prices in September.

It’s not just the gaming business that’s going through some big changes: Including today’s Xbox layoffs, Microsoft will let go of 4,800 employees across the company, or about 2.1% of its global headcount. That’s in addition to several layoff rounds last year, as well as a voluntary retirement program that kicked off in April. All of which suggests the company’s turnaround still has a long way to go.—SY