Microsoft lays off 4,800 employees as AI reshapes the company, Xbox loses 20% of its workforce

Microsoft is cutting 4,800 jobs in its latest round of layoffs, and the Xbox division is taking one of the biggest hits. Roughly one in five Xbox employees will leave over the next year, marking one of the largest restructurings in the gaming business since Microsoft completed its string of blockbuster acquisitions. The move comes at a time when the company is spending heavily on artificial intelligence and facing growing pressure from investors to improve returns.

The workforce reduction represents about 2.1% of Microsoft’s global headcount. Amy Coleman, Microsoft’s chief people officer, told employees the company is reshaping itself for a new phase of technology driven by AI and automation.

“The way technology is built, deployed, and used is transforming faster than at any point in my time here,” Coleman wrote in a message to employees on Monday.

Xbox will account for 3,200 of the planned reductions through fiscal year 2027. Xbox CEO Asha Sharma said 1,600 positions will be eliminated immediately, with another 1,600 scheduled over the coming months. According to a person familiar with the restructuring, the cuts amount to roughly 20% of the Xbox workforce.

“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.”

Sharma told employees the company expects Xbox to return to growth in 2027.

The announcement comes just one week after Business Insider reported that Microsoft was preparing to announce another round of job cuts as the tech giant continued efforts to control costs. Monday’s layoffs confirm that report and underscore how aggressively Microsoft is reshaping its workforce.

Xbox bears the brunt as Microsoft overhauls its workforce for the AI era

The layoffs arrive during a difficult year for Microsoft’s stock. Shares have fallen 19% in 2026 as investors question how much revenue Microsoft’s AI investments will generate. The company has poured billions into artificial intelligence infrastructure, products, and partnerships, yet many on Wall Street remain unconvinced that Microsoft’s own AI offerings have produced the commercial impact they expected.

This is far from Microsoft’s first workforce reduction. Last year, the company eliminated about 9,000 jobs across several rounds of layoffs. The latest cuts suggest Microsoft is still adjusting its cost structure as it pours capital into AI infrastructure and reorganizes parts of its business.

The gaming business is seeing some of the biggest structural changes. Four gaming studios will leave Microsoft’s ownership as part of the restructuring.

Compulsion Games and Double Fine Productions, both acquired during Microsoft’s gaming expansion in the late 2010s, will become independent companies again. Ninja Theory and Undead Labs, which joined Microsoft in 2018, have entered into agreements to move to new owners.

France-based Arkane Studios, which became part of Microsoft through its $8.1 billion acquisition of ZeniMax Media, is discussing strategic options with its employee works council.

The restructuring extends beyond gaming. Coleman said Microsoft’s commercial sales organization will lose positions as the company reshapes customer-facing teams.

The cuts come at an interesting point in Microsoft’s business. Cloud services and LinkedIn have continued to post healthy growth in recent quarters. Other businesses have struggled to keep pace. Revenue from Windows licenses, Surface devices, and Xbox has remained under pressure, creating uneven performance across Microsoft’s portfolio.

Earlier this year, Microsoft introduced its first voluntary retirement program, offering eligible U.S. employees at the senior director level and below the option to leave the company. Coleman said more than one-third of eligible employees accepted the offer and indicated Microsoft could pursue similar programs again.

“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.

Coleman pushed back on the idea that AI is directly replacing employees.

“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.”

Her comments reflect a broader shift taking place across the technology industry. Companies continue to hire for AI-focused roles, invest billions in data centers and specialized chips, and reorganize teams around automation. The result is a new operating model that places greater emphasis on AI-enabled work, fewer management layers, and tighter cost control.

For Microsoft, the latest layoffs signal that the company’s AI strategy is reshaping far more than its products. It is reshaping the organization itself.

Microsoft Layoff