New Xbox CEOs don’t usually open with a memo calling their own division unhealthy. Asha Sharma did exactly that on July 6, 2026, kicking off what she called the most significant restructuring in Xbox’s history — one that’s still playing out three months later as former Microsoft studios figure out how to survive on their own.

The numbers behind “we must reset Xbox”

Sharma’s memo cut straight to it: “Our business today is not healthy.” The announcement covered 1,600 role eliminations that day, part of a wider plan to cut 3,200 positions across Xbox by the end of fiscal year 2027 — roughly 20% of the division’s workforce. The restructuring also flattens Xbox’s management structure from as many as 14 layers down to no more than five, and pairs the cuts with a new COO position. Company-wide, Microsoft’s July actions totaled 4,800 job cuts, with Xbox absorbing a third of them on day one.

Four studios cut loose

Rather than close every affected studio outright, Microsoft split the July restructuring into two tracks. Ninja Theory (Hellblade) and Undead Labs (State of Decay) were sold off to buyers that haven’t been publicly named. Compulsion Games (South of Midnight) and Double Fine Productions (Psychonauts) instead went independent through management buyouts, each retaining their intellectual property and getting a runway of funding to operate on their own. A fifth studio, French developer Arkane Studios, was handled on a separate timeline entirely — French labor law requires a formal consultation period before a sale or closure can be announced, so its fate wasn’t resolved alongside the other four.

Double Fine’s independence came with its own layoffs

Freedom from Xbox didn’t mean stability. Less than a month after regaining independence, Double Fine founder Tim Schafer announced the studio was cutting 23 positions — more than a quarter of its roughly 90-person staff — saying “only the survival of our studio would make us consider such a painful action.” The studio did come out of the split with real assets: it regained publishing and IP rights to every game it released under Microsoft, permanently lowered prices on some of its back catalog, and launched a Kickstarter campaign, Amnesia Fortnight 2026 – Indie Reboot, running from August 31 through most of September to fund new small-scale projects.

Compulsion Games had a smoother landing

Compulsion’s split, finalized August 11, 2026, went differently. The Montreal studio’s management bought back the company along with the rights to South of Midnight, We Happy Few, and its 2013 debut Contrast — and reported no layoffs, with most of the existing team staying on. South of Midnight remains on sale through Steam and PlayStation Network, now self-published rather than carrying Xbox’s name as publisher. It’s a rare case in this story where “independent again” didn’t also mean “smaller.”

Why this round looks different

Xbox has cut jobs in nearly every year since the Activision Blizzard acquisition closed, but this restructuring is notable for treating some studios as worth preserving rather than shutting down outright — even if that preservation still meant real job losses at Double Fine. It’s also a concrete signal about where Microsoft sees its own limits: Sharma’s memo reportedly acknowledged the company had spread itself too thin across too many internal studios, a rare admission that the post-Activision Xbox portfolio grew faster than it could actually support. Whether Ninja Theory and Undead Labs land somewhere that keeps their franchises alive, or whether Compulsion and Double Fine’s independence proves sustainable past their first few months, will be the real test of whether this “reset” worked — Sharma has framed a return to growth as a 2027 goal, not a 2026 one.

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This is the same consolidation pattern showing up across the industry in 2026 — see our coverage of EA’s $55 billion take-private buyout for another major structural shake-up, or our breakdown of record industry profits alongside record layoffs for the bigger picture these Xbox cuts fit into.