Microsoft’s Xbox division is bracing for a sweeping internal “reset,” as leaders move from years of heavy investment to an era of cost-cutting, layoffs, and potentially shuttered studios amid a faltering business.

Early warnings and internal soul-searching

Concerns about Xbox’s trajectory surfaced publicly as analysts and reporters detailed a “brutal self-assessment” inside Microsoft’s gaming arm, describing a division “in crisis” after years of underperformance despite blockbuster acquisitions and big spending on content and hardware subsidies.¹

Behind the scenes, new Xbox CEO Asha Sharma and other leaders began laying out what they called “hard truths” about a “sagging brand,” acknowledging that overspending on deals like Activision had not translated into stronger profits or growth.¹ Articles chronicled how this introspection led to a conclusion that the current path was unsustainable.

The ‘reset’ memo and looming layoffs

By early June, those concerns crystalized into action. Reporting revealed that “Xbox warns of a ‘reset’ as it prepares for layoffs,” with significant job cuts expected next month and even the possibility of studio closures or changes to the Xbox studio lineup.² Sharma had already hinted at “making hard choices,” and a staff memo from Sharma and content chief Matt Booty warned employees of an “Xbox reset” over the next 100 days.²

In that memo, executives cited stark financials: excluding Activision Blizzard King, Microsoft had spent over $20 billion on content, platform, and hardware subsidies in five years while annual revenue still declined by nearly $500 million — concluding, “Going forward, this cannot continue.”²

Hardware crisis and new business models

At the same time, Xbox leaders flagged a “hardware component crisis,” with costs for the 2027 holiday season projected to be more than five times what they paid just two years earlier.² That pressure is driving exploration of “a new business model and partnerships for hardware,” potentially involving other PC makers producing Xbox-branded devices, and a plan to “evolve and rebuild” Xbox’s platform stack to compete in hardware, PC, mobile, and streaming.²

While leadership frames the reset as necessary for long-term survival, workers and fans now face months of uncertainty as Microsoft reshapes the future of Xbox.