Microsoft is axing 4,800 employees, most of them from its Xbox division, as it and the rest of the tech industry seek to adapt to the AI era.
The cuts come as the software giant has heavily invested in artificial intelligence after years of pouring cash into gaming.
“Our business is changing because the world around it is changing. The way technology is built, deployed, and used is transforming faster than at any point in my time here,” Amy Coleman, Microsoft’s chief people officer, wrote in a Monday memo to employees.
The layoffs included 1,600 Xbox employees who were immediately let go, with another 1,600 set to be axed over the rest of Microsoft’s fiscal year, according to Xbox Chief Executive Asha Sharma.
“Our business today is not healthy,” she wrote employees, going on to list challenges like slow growth.
“We are operating at margins that are 3-10x lower than comparable platform and publishing businesses,” Sharma added. “We must reset Xbox.”
Microsoft – which became a dominant force in the video game arena with the landmark launch of the Xbox in 2001 – is also selling or spinning off four game development studios and weighing strategic options for a fifth, according to Sharma.
The cuts account for 2.1% of Microsoft’s global workforce — and one-fifth of Xbox staffers.
AI has been blamed for layoffs throughout the tech sector, which saw its worst start to the year in terms of employment since 2023. The first three months of 2026 brought 52,050 tech layoffs — a 40% jump from the same period last year, according to executive coaching firm Challenger, Gray & Christmas – with AI increasingly being blamed for the cuts.
The soon-to-be axed Microsoft employees won’t actually be replaced by AI, Coleman said.
“At the same time, what is true is that AI is changing how work gets done. Some of the tasks we do every day can now be automated, and that means we all need to keep learning, keep building new skills, and keep adapting as the work evolves,” she said.
Microsoft stock was down about 1.5% as of midday Monday.
Microsoft – along with rivals Sony and Nintendo – has jacked up prices for its Xbox consoles amid a global memory chip shortage caused by seemingly bottomless demand for powerful chips from the AI sector.
The video game industry has faced waves of layoffs over the past two years after companies including Microsoft ramped up hiring during the COVID pandemic. That growth slowed once pandemic restrictions ended.
Microsoft bought game makers such as Activision Blizzard to strengthen Game Pass, its Netflix-style subscription service. Sharma acknowledged in the memo that Game Pass “did not grow at the pace we expected.”
Xbox revenue fell 5% in the quarter ended in March compared with a year earlier. The division’s profit margin for the fiscal year ended in June was 3%, down from the previous year.
Microsoft CEO Satya Nadella tapped Sharma, the former chief operating officer of Instacart, to helm Xbox in February despite her lack of experience in the video game industry. Since taking over, she has hustled to reshape the business.
Sharma is reducing the number of games Microsoft publishes while putting more resources behind its biggest franchises, including Minecraft, Candy Crush and Fallout. She also lowered the price of Game Pass after the service lost subscribers following a price increase last year, and stopped adding new “Call of Duty” titles to the subscription service, requiring players to purchase them separately.
Beyond gaming hardware and subscriptions, Xbox operates Microsoft’s digital game store for Windows PCs. As the company scales back its own game development, Sharma is working to make Microsoft a more attractive distribution platform for the growing number of independent game developers.
