The Xbox reset is now official: Microsoft has internally announced a radical redesign of its gaming strategy, with layoffs expected to be announced on July 6, 2026, the possible closure of at least five studios, and game cancellations. New CEO Asha Sharma, who took over in February 2026, along with chief content officer Matt Booty, informed staff about the so-called “Xbox reset” on June 10, 2026, citing an “overstretched” studio system, a component crisis, and plummeting profitability.
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The economic backdrop to this crisis is strikingly serious. Between 2021 and 2026, Microsoft invested more than $20 billion in content, platform, and hardware subsidies — not counting the Activision Blizzard acquisition of King — yet annual revenue fell by nearly $500 million over the same period. Gaming revenue fell to $5.3 billion (from $5.7 billion), while hardware revenue plunged 33%. The so-called “accountability margin” — a measure of operating profitability — has shrunk to just 3%, down from around 15% previously.
A key factor in the collapse in profitability was the strategic decision to release Xbox on PlayStation 5.While this increased the player base, it also strengthened Sony and weakened the value of Xbox. Sharma acknowledges that the company became “overextended” after the acquisitions of ZeniMax Media and Activision Blizzard, creating a cumbersome and inefficient studio system.
Xbox Reset: Which studios are at risk and which layoffs are coming
According to information cited by The Verge , the Xbox reset will involve the closure of at least five studios , possible mergers, spinoffs and cancellation of games — including the highly anticipated Marvel's Blade . Ninja Theory , the studio behind the Hellblade series, has already been confirmed to be closing , although there are hopes of a third-party acquisition. At the same time, studios such as Compulsion Games and Double Fine are in negotiations for potential spinoffs. Microsoft has already made four major layoffs since its acquisition of Activision Blizzard , closing studios such as Arkane Austin , Alpha Dog Games and The Initiative .
Meanwhile, IO Interactive — known for the Hitman and the upcoming 007 First Light — announced layoffs after it cut ties with an “external partner” on its new Project Fantasy, an online fantasy RPG for which Microsoft was set to be the publisher. The number of employees affected remains unclear, but the company has pledged to support those affected and confirmed that Project Fantasy is continuing. It’s worth noting that OD remains in the Xbox, despite the cuts.
See also: Three Xbox studios try to split off from Microsoft's restructuring
Xbox Reset and component crisis: Console prices are rising
Another factor exacerbating the Xbox reset is a global memory and storage component crunch, driven in part by demand from AI companies. The cost of console components has reached 5x what it was two years ago — and has doubled twice since February 2026 alone. Microsoft already raised console prices by $20 in October, to $70, and is expected to hike them further by fall 2027.Consoles are often sold below cost, making the component crunch particularly painful for the industry.
To address the crisis, Sharma is looking for new hardware partnerships — including with the company Helix — while also reducing marketing budgets. Game Pass, which had been frozen for 8 months, has returned to growth according to the new CEO, who emphasized that the next 100 days are critical for redesigning the business model. Also notable is the reduction in the price of Game Pass, although new Call of Duty have been removed from the package.
Xbox serves over 1 billion players annually , with 72 billion hours of gameplay across console, PC, mobile and streaming. Despite this massive footprint, profitability remains a major headache. Sharma talks about moving to a “self-sufficiency” model, reducing reliance on third-party vendors and focusing investment on projects with clear profitability. The rebranding from Xbox to XBOX , console exclusivity for titles like Gears of War: E-Day and Clockwork Revolution , and structural changes at the studios, outline a company attempting to reinvent itself in a highly competitive environment.
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The Xbox reset is perhaps the biggest strategic shift in the history of Microsoft. If the new leadership can streamline the studio structure, stabilize hardware costs, and revitalize Game Pass, Xbox could regain a competitive position against Sony's PlayStation. But if the component crisis persists and layoffs further weaken the pipeline of exclusive titles, the road to recovery will be long and painful.
