Microsoft on Monday said it was making major changes to its Xbox video game business, dropping several game studios and cutting its Xbox work force by 20 percent. The company said it would lay off 1,600 Xbox employees now and cut another 1,250 roles over the next year.
The initial Xbox layoffs are part of 4,800 job cuts that Microsoft announced on Monday, which accounts for roughly 2 percent of the company’s work force. It is Microsoft’s latest employee culling as it plows tens of billions of dollars into the infrastructure for building artificial intelligence.
Microsoft executives acknowledged that the company had misread the economic challenges facing the video game industry.
“Our platform teams are 40 percent larger than they were at the start of this generation, even as our player base and playtime have declined,” Asha Sharma, Xbox’s chief executive, wrote in a letter to employees. “As we reset XBOX, we will simplify.”
While Xbox is responsible for about 6 percent of Microsoft’s revenue, the brand has been one of the largest and most influential forces in the video game industry since it entered the console wars with Nintendo and Sony in 2001.
During the pandemic, video games became a crucial consumer business for Microsoft. But since then, the company’s overwhelming priority has been investing in A.I., while the video game division’s sales have dropped.
Analysts said the company had overspent on game acquisitions, underperformed with consumers and made a series of strategic blunders. Microsoft also faces a problem that recently led Apple to raise prices: The A.I. boom has sharply increased the costs of memory chips used in its devices.
Ms. Sharma joined Xbox five months ago with a plan to reinvigorate Microsoft’s video game business. In her letter to staff, Ms. Sharma set an ambitious goal of doubling Xbox’s reach to a billion daily users.
“History is full of companies that mistake longevity for inevitability,” Ms. Sharma wrote. “We will not be one of them.”
Instead of shuttering a number of critically acclaimed studio brands that it owns, Xbox plans to provide ways for some studios to survive outside the company, potentially sparing about 350 employees from layoffs.
Double Fine, which created the Psychonauts series, a comedic adventure of psychic spies, and Compulsion Games will become independent companies under their existing management, retaining the franchises they had developed under Microsoft, according to Xbox executives. Undead Labs and Ninja Theory will be sold to undisclosed buyers. A fifth developer, Arkane Studios, is beginning to explore other options.
There will be cuts in Xbox’s remaining studios, including Activision Blizzard and ZeniMax Media, as well as across the brand’s platform teams.
The changes at the studios amount to a sharp about-face for Xbox, which has spent billions buying up developers. In 2023, Microsoft completed the largest acquisition in gaming history with the $69 billion purchase of Activision Blizzard, the hitmaker behind games like Call of Duty and Candy Crush. Microsoft had made other acquisitions, including spending $7.5 billion to buy ZeniMax Media, which publishes series like Fallout and The Elder Scrolls.
The hope, at the time, was that an expanded catalog of titles would lead to more console and software sales. But the Xbox Series X|S, a console released in 2020, was a commercial disappointment. In a typical year, Ms. Sharma said in her email to employees, Xbox lost 64 cents for every dollar it invested.
Satya Nadella, Microsoft’s chief executive, recently discussed the challenges facing the company’s video game business on “Hard Fork,” The New York Times’s tech podcast.
“We have to turn this into a sustainable business that delivers what is fundamentally one of the best sources of entertainment,” Mr. Nadella said. Xbox gamers streaming their playing on YouTube made more money off the games than Microsoft did, he added.
Microsoft is among a number of big technology companies cutting jobs as they shift money toward A.I projects. In April, the company told investors it expected to spend about $190 billion on capital expenditures for data centers and other infrastructure this calendar year, up more than 60 percent from 2025. 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,” Amy Coleman, the chief people officer, wrote to employees on Monday. She said A.I. would not replace the jobs, but the technology was changing priorities and how people work.
Microsoft’s head count grew sharply during the Covid-19 pandemic, jumping 26 percent in two years to hit 221,000 by June 2022. Since then, it has barely budged. The company’s profit for this fiscal year is expected to jump 26 percent from the previous year when it reports results for the quarter that has just ended.
In addition to the Xbox cuts, Microsoft’s sales force was also hit hard by the layoffs as the company continues to retool how it sells its A.I. products. Many of the sales cuts were outside the U.S. Less than 1 percent of the company’s work force in its home state of Washington were let go.
Early last summer, Microsoft laid off about 15,000 employees. In April, the company offered its first-ever buyouts to thousands of long-serving workers. The buyouts were offered to about 7 percent of U.S. employees, and the company told investors that they would cost about $900 million. Ms. Coleman said that more than 30 percent of the people eligible for the retirement package took Microsoft up on the offer.
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