Microsoft this week delivered the deepest blow yet to its Xbox division, announcing plans to lay off 1,600 employees immediately and another 1,600 over the next fiscal year while shuttering four studios. The drastic restructuring has reignited speculation that the company could eventually sell off its gaming arm.
Xbox CEO Asha Sharma has been blunt about the rationale. In an internal memo, Sharma described the business as “not healthy,” and in an interview with Fortune, she acknowledged that Microsoft “simply spread ourselves too thin.”
The cuts are part of what the company is calling an Xbox “reset,” a strategic pivot that involves narrowing the division’s focus exclusively to blockbuster titles. Obsidian Entertainment is reportedly being redirected to work on Fallout instead of Avowed, while ZeniMax Media — one of Microsoft’s major studio acquisitions — laid off 158 workers in Texas alone this week.
The Case for a Divestiture
With Microsoft pouring record investment into artificial intelligence and cloud infrastructure, analysts question how well a struggling consumer hardware business fits into the company’s long-term strategy. New York University professor Joost van Dreunen told The Verge that a “wholesale divestiture of Xbox remains on the table, and it looks likelier given Xbox’s struggles with rising hardware costs and Microsoft’s focus on AI and infrastructure.”
“It’s never been clear what role Xbox plays in Microsoft’s flywheel,” van Dreunen added.
The question, however, is who could realistically buy Xbox. The division generates more than $23 billion in annual revenue and encompasses hardware manufacturing, game publishing, dozens of studios (including Activision Blizzard, Bethesda, and Obsidian), and the Xbox Game Pass subscription service.
Who Would Buy?
According to van Dreunen, a full sale is the “less likely path.” Few potential buyers — even tech giants like Amazon, Netflix, or Tencent — would want to take on an entire interactive entertainment conglomerate of that scale. A sovereign wealth fund might have the capital, but would lack the operational expertise to run a global gaming business.
The more probable scenario, analysts suggest, is a piecemeal sale. Microsoft could divest individual studios, license its IP catalog, or spin off Xbox hardware while retaining Game Pass as a software service. This would align with the company’s broader strategy of focusing on high-margin software, cloud, and AI businesses.
A Bleak Week for Xbox
The layoffs and closures represent the most aggressive cost-cutting in Xbox history. Beyond the headline numbers, Obsidian Entertainment shed roughly 25 percent of its staff, and the studio pivot to Fallout signals a shift away from original IP toward established franchises.
For Microsoft, the calculus is clear: every dollar spent on Xbox hardware and mid-tier game development is a dollar not spent on AI data centers and Copilot infrastructure. As the company’s market capitalization increasingly depends on its AI narrative, the consumer gaming business — once a crown jewel — looks more like a distraction.
Whether Xbox survives as a Microsoft-owned entity or finds new owners in parts, the reset marks the end of an era for one of gaming’s most recognizable brands.