Microsoft Plans Major Xbox Overhaul Amid Rising Costs

Microsoft’s Xbox division is preparing for a broad internal overhaul as financial pressure continues to mount across the gaming business. Rising hardware costs and reports of possible layoffs have added to the challenges being faced by the company’s long-term strategy.

Reports from Bloomberg indicate that Xbox is planning major workforce reductions shortly after Microsoft’s fiscal year (FY) closes on June 30, 2026, though the scale remains unclear. The same report indicated that budget reductions are also being planned across marketing and other operational areas. Separate reporting from The Verge suggested the restructuring could extend to studio closures or changes within Xbox’s first-party lineup.

The developments follow a June 10, 2026, memo from Xbox chief executive officer (CEO), Asha Sharma, and chief content officer (COO), Matt Booty, who told employees the company must now “reset the business” after what they described as an unsustainable five-year trajectory.

The memo revealed that Xbox expects to close the FY with a 3% accountability margin, down from the previous year. Leadership disclosed that Microsoft invested more than $20 billion USD into hardware subsidies, content, and platform development during that span, excluding the Activision Blizzard King acquisition. In comparison, annual revenue declined by nearly $500M.

Xbox Hardware Costs and Studio Strategy Face New Pressure

A major concern outlined in the memo is a worsening hardware component crisis.

Sharma stated that the cost of console storage components was already more than double previous levels when she became CEO in February 2026, and has since doubled again. By the 2027 holiday cycle, Xbox expects those costs to exceed five times what the company paid two years earlier. Meanwhile, memory prices have followed a similar upward trend. Xbox linked that increase to growing artificial intelligence (AI) infrastructure demand across the technology sector, including Microsoft’s own large-scale investment in AI.

Executives also pointed out that Xbox's rapid studio expansion through the acquisitions of ZeniMax Media and Activision Blizzard left the company stretched too thin. This happened while supporting multiple business models across subscription, cloud, and hardware.

That expansion has already been followed by cuts. Since the Activision deal closed in 2023, Microsoft has completed four rounds of layoffs affecting thousands of roles, and shut down Alpha Dog Games, Arkane Austin, and The Initiative.

The memo also pointed to platform inefficiencies, with leadership saying that Xbox’s systems have become “overly complex, spanning hundreds of dependencies” and that they have “become too reliant on vendors to operate our systems.” Sharma and Booty stated the company will now adapt and rebuild our stack, “increase the value we ship to players while decreasing the time it takes to do so,” and evaluate new acquisitions. They also said they will adjust investment priorities across hardware, mobile, PC, and streaming as it works to stabilize the business.