Xbox's devastating July was inevitable

In July 2026, Microsoft's Xbox division announced a devastating wave of layoffs, marking a turning point in the company's gaming business. The company cut 3,200 jobs within Xbox, with half of the staff laid off immediately and the remaining half over the next fiscal year. This sweeping reduction encompassed various departments, including hardware, gaming, marketing, and platform teams, casting a shadow over the future of Xbox's operations.

Notably, high-profile studios like Arkane Studios, Compulsion Games, Double Fine, Ninja Theory, and Undead Labs faced uncertain fates, with four of these teams ultimately divested. The layoffs extended to prominent developers like id Software, which saw a 50% reduction in its workforce, while Double Fine had to let go of a third of its employees after buying itself back from Microsoft.

The fallout also affected Obsidian Entertainment, a studio behind Fallout: New Vegas, which cancelled multiple projects, including a sequel to Avowed.

Microsoft's executives, including Xbox CEO Asha Sharma and Chief Content Officer Matt Booty, had been warning of the company's precarious financial situation in a June memo, highlighting internal issues with Xbox games, consoles, infrastructure, and marketing. They predicted a reset for the business and emphasized the need to address the declining revenue and growing costs.

Following the layoffs, Xbox union members, represented by CWA, demanded fair treatment and negotiations over worker protections. They accused Microsoft of neglecting their concerns and allocating the company's vast financial resources without proper consideration. The employees even filed lawsuits against Microsoft for unfair labor practices and staged protests outside the company's offices.

Despite these challenges, Microsoft continued to face significant financial setbacks. In July, the company revealed a revenue decline of 10% for Xbox, with its reported revenue falling by over $2 billion year-to-year, putting it behind its main competitor, PlayStation. These developments came on the heels of two years of rolling layoffs and eight years of reckless studio acquisitions, revealing a pattern of prioritizing potential revenue over creative processes.