Microsoft Restructuring Cuts 4% of Workforce; Gaming Studios Shuttered in AI Pivot

Microsoft has initiated another major workforce reduction, eliminating 9,100 positions – approximately 4% of its global workforce in a move that significantly impacts its gaming division. This marks the company’s fourth round of layoffs within 18 months and its deepest single cut since 2023, bringing total job losses this year alone to over 15,000 employees. The cuts, effective at the start of Microsoft’s 2026 fiscal year, target employees across “different teams, geographies and levels of experience,” though the Xbox unit appears disproportionately affected.

Gaming Division Bears Heavy Burden

Microsoft Gaming CEO Phil Spencer confirmed the layoffs in a company-wide memo, stating the division would “end or decrease work in certain areas” and “follow Microsoft’s lead in removing layers of management to increase agility and effectiveness”. Specific impacts include:

Studio Closures and Project Cancellations: Santa Monica-based studio The Initiative (developing the Perfect Dark reboot) is shutting down entirely. Rare’s long-anticipated fantasy adventure Everwild and several unannounced projects have been canceled.

Deep Cuts at Key Studios: Candy Crush maker King is laying off roughly 200 employees (10% of its staff), primarily in Barcelona. ZeniMax Online Studios (behind The Elder Scrolls Online) is canceling an unannounced MMORPG in development since 2018. Turn 10 Studios (Forza Motorsport) is losing over 70 staff.

Prioritization Strategy: Spencer framed the cuts as necessary to “protect what is thriving and concentrate effort on areas with the greatest potential,” despite acknowledging Xbox currently enjoys “more players, games, and gaming hours than ever before”. Impacted employees will receive severance and priority consideration for other roles within Microsoft Gaming.

Strategic Drivers: AI Investment and Post-Acquisition Realignment

The layoffs occur against a backdrop of immense strategic pressure and investment. Microsoft is channeling $80 billion in capital spending toward artificial intelligence infrastructure and data centers in fiscal year 2025, costs that have pressured profit margins. Simultaneously, the company continues integrating its $69 billion acquisition of Activision Blizzard, finalized in October 2023, which expanded its gaming workforce substantially.

CFO Amy Hood emphasized on an April earnings call the company’s focus on “building high-performing teams and increasing our agility by reducing layers with fewer managers”. Analysts see the cuts as a reallocation of resources. “They’re focused more and more on AI, cloud, and next-generation Microsoft and looking to cut costs around Xbox and some of the more legacy areas,” Wedbush Securities analyst Dan Ives told the Associated Press. “This is Nadella and team making sure that they’re keeping with efficiency”. The rise of AI tools within Microsoft’s own operations also plays a role; CEO Satya Nadella previously noted that “maybe 20, 30% of the code” for some projects is now AI-generated.

Morale and Industry Impact

The relentless pace of restructuring has severely impacted morale. Multiple employees described bracing for the worst in recent weeks, fearing further cuts after previous rounds eliminated 1,900 gaming roles in January 2024, followed by studio closures (Arkane Austin, Tango Gameworks) in May, and 650 more cuts last September. An anonymous developer within the Xbox ecosystem lamented the human cost, telling IGN, “These decisions erase years of specialized work and trust built within teams.”. The cuts contribute to a devastating trend across the tech and gaming sectors, where an estimated 11% of game developers lost jobs in 2024.

Microsoft reported a robust $25.8 billion in quarterly net income in late April alongside an upbeat forecast. The juxtaposition of strong financial performance, record stock prices nearing all-time highs, and continuous layoffs underscores a stark corporate priority: sacrificing current stability in certain divisions to fund an all-in bet on AI and streamlined operations for future dominance. Spencer acknowledged the dissonance in his memo: “These decisions are not a reflection of the talent, creativity, and dedication of the people involved. Our momentum is not accidental”. For thousands of employees, however, that momentum has come to an abrupt halt.