Microsoft cuts 2.1% of employees as Xbox unit plans to spin studios

Microsoft said Monday it is immediately eliminating 4,800 jobs, representing 2.1% of its workforce, in the software giant’s latest effort to cut costs in the era of artificial intelligence. Its Xbox division will lose about one-fifth of its staff, including 1,600 jobs on Monday and additional cuts in the coming months.

“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 and a 27-year company veteran, wrote in a message to employees Monday.

Xbox will be cutting a total of 3,200 people, Xbox CEO Asha Sharma wrote in an email to division employees. Half of those roles are part of the 4,800 jobs being eliminated Monday, and the other 1,600 people will be exiting throughout fiscal year 2027.

“I recognize that a year-long restructuring creates additional challenges,” Sharma wrote. “Unfortunately, it is not possible to make all the necessary changes in a single day.”

The cuts amount to 20% of Xbox employees, according to a person familiar with the matter, who asked not to be named in order to discuss internal changes.

“We will return to growth in 2027,” Sharma wrote.

Microsoft has been the worst performer among megacap tech stocks so far in 2026, falling 19% as of Friday’s close, as investors fear that generative AI models might displace wide swaths of enterprise software, while Microsoft’s own AI models and services have yet to become big hits. Last year Microsoft conducted several rounds of layoffs, including one that cut 9,000 jobs.

Microsoft shares slipped 1% during Monday’s trading session, while the technology-heavy Nasdaq Composite index advanced 1%.

While Microsoft recorded accelerating growth in cloud services and LinkedIn in recent quarters, it’s lagging in other areas, such as Windows operating system licenses, Surface devices and the Xbox gaming unit, where revenue has been shrinking.

As part of Monday’s announced changes, four gaming studios will be spun out of Microsoft, Coleman said. The commercial business that focuses on selling to customers will also see reductions.

The Compulsion Games and Double Fine Productions studios, which Microsoft acquired in the 2010s, will become independent again, Sharma said in her note. Ninja Theory and Undead Labs, which joined Microsoft in 2018, “have entered terms to join new ownership,” she wrote.

“We’re thankful to everyone at Xbox for seven great years together, and for working with us to reach an outcome which preserves our history and culture, and returns ownership of our games to us,” Double Fine in an X post.

France-based Arkane Studios, which arrived at Microsoft through the $8.1 billion ZeniMax Media acquisition in 2021, is in touch with its works council regarding strategic options, Sharma wrote.

“This is not a business Microsoft needs to be in, or should be in,” DA Davidson analyst Gil Luria said on CNBC, referring to Xbox. “It is very possible that they will spin it off at some point.”

In April, Microsoft introduced a one-time voluntary retirement program, a first for the company. The effort has targeted U.S. employees at the senior director position and below. More than one-third of eligible employees have accepted the offer, and the company “will continue exploring similar approaches in the future,” Coleman wrote.

“Decisions like these are never easy, and you have my commitment that we are constantly looking for ways to reduce the need for job eliminations,” Coleman wrote.

While much of Wall Street’s concerns about Microsoft are tied to the company’s position in AI and CEO Satya Nadella’s failure to lay out a coherent strategy for its approach to developing models, agents and other services, AI isn’t replacing laid-off workers, Coleman wrote.

“At the same time, what is true is that AI is changing how work gets done,” she wrote. “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. Our customers are navigating this same shift, and they’re counting on us to help them through it. We can’t do that well unless we’re doing it ourselves.”