The problems of the video game industry crystallize within it Microsoft’s Xbox.

A new round of layoffs at the tech giant’s gaming division shows how those pressures are coming home as costs rise and gamers spend more time on just a handful of favorites. Additionally, there are some Microsoft-specific issues to address.

“Our business today is not healthy,” new Xbox CEO Asha Sharma wrote in an email announcing the layoffs, along with plans to sell four studios and make leadership changes, all efforts aimed at turning around the gaming unit. “We are operating at margins that are 3 to 10 times lower than those of comparable platforms and publishing businesses.”

Sharma started the job in February, replacing former Xbox boss Phil Spencer. She joined Microsoft in 2024 from Instacart and previously served as president of product in Microsoft’s Core AI business.

The Xbox layoffs will immediately affect 1,600 positions and will be followed by another 1,600 cuts throughout fiscal 2027, Sharma said. The combined total will represent about 20% of the Xbox unit, and two-thirds of a company-wide reduction also announced Monday, which will affect 4,800 workers.

Some of the company’s gaming employees told Business Insider that they had seen cuts because the business had been struggling, but they were surprised by their scale.

“No one expected it to be this bad,” said one laid-off employee at an Xbox studio.

It’s harder to level up

The pandemic fueled a boom in consumer spending in the gaming industry that has since faded, giving way to a steady pace of layoffs.

Excluding Monday’s Xbox cuts, an estimated 4,600 jobs at studios large and small have been cut so far this year across the gaming industry, compared with 5,300 in all of 2025 and 14,600 in 2024, according to an online tally of layoff announcements and news reports compiled by Farhan Noor, a technical artist in California. Sony’s PlayStation division has also suffered layoffs in recent years.

Meanwhile, the cost of creating blockbuster games has skyrocketed as studios pursue more ambitious releases with longer timelines and bigger budgets. Some analysts estimate that “Grand Theft Auto VI,” a highly anticipated game coming out in November, cost developer Rockstar Games between $1 billion and $1.5 billion.

Unlike mobile gaming, the most lucrative corner of the industry, console gaming requires expensive dedicated hardware, making it difficult to reach casual gamers, said Wedbush Securities analyst Michael Pachter. The rise of AI has added pressure by increasing demand for memory and storage, making consoles more expensive to build, he added.

For example, Microsoft has said it will increase Xbox console prices by between $100 and $150, depending on the model, starting August 1. Sony made a similar move in April for its PlayStation 5 consoles. Both companies’ current-gen consoles debuted in 2020, and console prices have historically fallen as the generation passes, not increased.

Players are also spending more hours inside a small number of long-running games that are regularly updated, such as Epic Games’ “Fortnite,” making it harder for new releases to break through, Pachter said. “Grand Theft Auto VI” could intensify that dynamic if players dedicate months or even years to it.

Consumer demand remains strong, and global industry revenue is expected to grow 4.2% this year to $260 billion, said Joost van Dreunen, chief executive of the analytics firm and a professor at New York University’s Stern School of Business.

“Gaming companies are expected to improve their margins and to do so, they are cutting jobs,” he said.

‘Call of Duty’ falls short

However, Microsoft’s problems go beyond pandemic-era overhiring and broader industry pressures. The company’s Xbox consoles have long trailed Sony Group’s PlayStation machines and Nintendo’s Switch in sales, while its Game Pass subscription service has struggled to achieve significant growth.

At the beginning of the decade, the company made two bold bets in hopes of making Game Pass more attractive. It acquired ZeniMax Media, the parent company of “Fallout” maker Bethesda Softworks, in 2021 for about $8 billion, and “Call of Duty” maker Activision Blizzard in 2023, for about $69 billion.

In Monday’s dismissal email, Sharma said that not all of the company’s game studios generate returns. In a typical year, he said, “we lost 64 cents for every dollar we invested.”

Benchmark analyst Mike Hickey outlined the layoffs and changes that Sharma described as necessary.

“They overbuilt the organization,” he said of Microsoft’s Xbox business. “They added studios, employees and layers of management, all while growth slowed. And they created a cost base that has become difficult to support.”

Microsoft’s Game Pass service was supposed to help offset the slowdown in the console business by turning Xbox into a subscription-driven platform equipped with its own blockbuster games, Hickey said.

The deal with Activision was critical to that bet, giving Microsoft control of “Call of Duty,” one of the most successful gaming franchises of all time. But the first-person shooter series hasn’t yet generated the subscriber growth Microsoft had hoped for, Hickey said, leaving Xbox with a larger content operation and not enough growth to support it.

“It’s pretty clear that the game creates more value as an $80 premium launch than as a subscriber acquisition tool that hasn’t really delivered results,” he said.

Microsoft’s chief human resources officer, Amy Coleman, said the jobs being eliminated at Xbox and elsewhere in the company are not being replaced by AI. Still, the layoffs come as the tech giant has been investing billions of dollars in artificial intelligence infrastructure and as investors fear the technology could disrupt traditional software. Those concerns helped Microsoft shares fall 19% in June, their worst monthly performance since the dot-com era.

To put a spin on Xbox, Sharma is now deviating from the unit’s old playbook. By flattening management, spinning off some studios and assuming direct oversight of others, such as King, the creator of “Candy Crush,” Pachter said he appears to be trying to bring more discipline to a booming games business.

“Asha is doing the right thing,” he said. “Asha is much more interested in doing the right thing than being popular.”

Additional reporting by Tom Carter.