Xbox cuts 3,200 jobs in biggest restructure in Microsoft gaming history

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The Xbox reset announced on July 6 is the biggest, most controversial restructure in the Microsoft division's history. The broad strokes are simple: Xbox is cutting 3,200 jobs, 1,600 of them being immediate layoffs , in a spate of studio spin-outs and redundancies off the back of low profit margins. The company has become unhealthy , according to CEO Asha Sharma, with the restructure aimed at "reset[ting] our content portfolio".

Basically, Xbox is paring back its output to its highest-earning franchises and will be rerouting money and people into them. But with each new day bringing more numbers, outrage, and insights into Sharma's "Resetting Xbox" announcement, I can't be the only one who feels the picture is getting foggier by the hour.

Here, I'm going to go through everything we know so far about the Xbox restructure, from the studios being sold back to themselves as independent developers to the layoffs and consultancy periods we know of right now. I'll touch on how Xbox managed to get here in the first place, and what the reset might mean for all the upcoming Xbox Series X games now that development teams have been cut or divested entirely.

Layoffs

(Image credit: Xbox Game Studios) Xbox announced 1,600 immediate "role eliminations" in the first stage of its reset, with the majority coming from ZeniMax studios Bethesda, ZeniMax Online, and id Software, with further instant cuts made at Obsidian.

After receiving a notice from the Texan Workforce Committee, Game Developer reported that 136 jobs in total have been cut from id Software, with a further 22 being made at Bethesda Game Works. This brings us to 158 job losses under the ZeniMax umbrella at the time of writing.

What is happening to id Software?

Xbox has dramatically cut jobs at id Software in its latest round of company layoffs. The Doom and Wolfenstein developer has reportedly reduced to "support studio" size . In terms of actual numbers, it's alleged that only one person remains working on the game engine itself.

Co-founder John McCarmack took to X to voice his sadness at the situation, though his feelings are tempered with an understanding of the layoffs as a business decision. "To continue being produced long term, games need to succeed, not just be beloved," he writes. "Games are competing with every other option for spending your leisure time and money, and the competition is brutal."

What is happening to Bethesda and ZeniMax Online?

Members of Bethesda Game Studios working on The Elder Scrolls 6 have been let go from Xbox as part of the reset, including "dozens of programmers, artists, designers and testers" and an iconic Fallout and Skyrim artist who had been at Bethesda for almost 20 years. A number of ZeniMax Online developers, the team behind Elder Scrolls Online, have also reportedly been cut.

The Bethesda Games Studios Union has been vocal in its backlash against these sudden and sharp job losses, with concerns around upcoming Bethesda games mounting for players and developers alike.

What is happening at Obsidian?

Obsidian Entertainment has seen a number of jobs cut during the first round of the Xbox reset, despite the success of last year's Avowed and Grounded 2. There's no news yet on exactly how many developers have been let go, but it looks like the developer will be changing tack to focus on another Fallout game.

Studio exits

(Image credit: Xbox Game Studios) As part of the Xbox Reset, CEO Asha Sharma has announced that four Microsoft-owned studios "will leave Xbox to new management," meaning they are to be sold and will no longer be part of Xbox's in-house developer cohort. In addition, Arkane Studios (Dishonored, Deathloop, Redfall) has entered "required consultation" in Lyon, France, to decide the developer's future.

The four Xbox studios being sold as part of the reset are:

Compulsion Games (We Happy Few, South of Midnight)

Double Fine (Psychonauts, Psychonauts 2)

Ninja Theory (Hellblade, Hellblade 2)

Undead Labs (State of Decay, State of Decay 2)

What is happening to Compulsion Games?

Compulsion Games will be sold back to itself as an independent developer as part of the Xbox restructure. The developer made its own announcement on BlueSky shortly after Sharma's Xbox News post, confirming that the studio will retain all rights to We Happy Few, Contrast, and last year's South of Midnight.

"As an independent studio, we are excited to continue building the distinctive games that define Compulsion while taking the next steps in our journey," the post reads.

What is happening to Double Fine?

Just like Compulsion, Double Fine is to go independent again as Xbox sells the studio back to its original founders along with the rights all all its games.

"We're thankful to everyone at Xbox for seven great years together, and for working with us to reach an outcome which preserves our history and culture, and returns ownership of our games to us," says Double Fine in a news bulletin . "We will share more news soon on what comes next."

What is happening to Ninja Theory?

Ninja Theory is being sold to new management. The developer is yet to provide comment on their view of the situation, but its new game , Senua, was announced at Summer Game Fest and funding from Xbox is being provided for the team to finish development.

What is happening to Undead Labs?

Same as Ninja Theory, State of Decay 3 studio Undead Labs is to be sold on to "new management" as part of Xbox's restructure. The developer is approaching the move optimistically, having made a Discord announcement (posted to Reddit here ) reinforcing how its "commitment to this community has never been stronger" as Undead Labs "begins a new chapter."

What is happening to Arkane?

Of all the devs affected by the Xbox restructure, Arkane Studios' future is the murkiest. Arkane has entered "required consultation" with its Works Council (elected employee representation) in France, which means the studio is in discussions about what its next steps should be.

All Xbox has said so far is that it is currently considering "potential strategic options" for Arkane Studios, so whether those options include layoffs or divestment is not yet clear. Xbox is yet to comment further.

What does the reset mean for future Xbox games?

(Image credit: Bethesda Game Studios) With the Xbox reset impacting multiple studios with games either in active or conceptual development, the severity will depend upon whether the teams have been cut or the studios themselves sold on.

As Compulsion and Double Fine are being sold back to themselves as independent developers, each will leave Xbox with " their IP, catalog, and runway for their next games" intact according to Sharma's announcement.

Compulsion confirmed in a post on Blue Sky that it will keep the rights to games shipped under Xbox, including last year's dreamy South of Midnight, and Double Fine reiterated that it will also regain full rights to its back catalogue too.

Meanwhile, it looks like Ninja Theory and Undead Labs will retain "funding to complete and grow Senua and State of Decay 3" after being divested and sold off to new management. Senua was only recently announced at Summer Game Fest 2026, and State of Decay 3 has been in development for six years and is finally slated to launch in February 2027. It also leaves another question in the air: whether State of Decay 3 will launch on Game Pass at all , let alone on day one, now that Undead Labs is splitting from Xbox.

(Image credit: Obsidian Entertainment) Aside from slashing its workface, another goal of the Xbox reset is to course-correct the division's poor profit margin by reinvesting time and manpower into flagship franchises. This means Obsidian has had to scrap plans for Avowed 2 altogether, allegedly working on a new Fallout game instead. Off the back of that, Bethesda will continue working on The Elder Scrolls 6 as one of the key tentpole franchises remaining under Xbox, while there's been no mention of Fable 4 developer Playground Games in any of the announcements so far.

Most intriguing to me right now is what will become of Marvel's Blade , which is in development at Arkane. Xbox has revealed very little about Arkane's "required consultation" period, including whether it intends to make redundancies or sell the studio off entirely, so I'll have to get back to you on that one.

As for why any of this was necessary in the first place, I've already touched on the lack of profitability Xbox is experiencing at the moment. But according to Reuters , Microsoft is axing 4,800 jobs across the whole company ("more than 2% of their global workforce") to finance its AI spending. It seems Xbox is just bearing the brunt of that figure. AI is one of Microsoft's biggest interests at the moment, and with Xbox boss Sharma announcing her role as an "external advisor" to the US Federal Reserve on "productivity and jobs" in the wake of AI technologies, it's all starting to sound a little circular.