Microsoft to cut 4,800 jobs as internal memos reject 'AI' narrative, reveal sweeping Xbox overhaul

Microsoft has begun one of its largest rounds of layoffs in recent years, cutting around 4,800 jobs, or roughly 2% of its global workforce, as the software giant says it is simplifying its organisational structure rather than reducing headcount because of artificial intelligence. The company confirmed the layoffs earlier this week, making it the latest technology giant to announce workforce reductions amid continued spending on AI infrastructure. However, in an internal memo to employees, Microsoft's Chief People Officer Amy Coleman pushed back against suggestions that the cuts were being driven by AI.

"These changes are not about reducing the number of people doing work because AI can do it instead. They are about reducing layers with fewer managers and streamlining our products, procedures and roles," Coleman wrote in the memo. She added that the objective is to make Microsoft "more agile by reducing unnecessary complexity" and ensure employees are "empowered to spend more time focusing on meaningful work by using new technologies and capabilities."

Coleman acknowledged the impact on employees, writing that "these decisions are among the most difficult we have to make," while emphasising that the company continues to hire in strategic areas despite the reductions.

The latest layoffs come as Microsoft continues to invest heavily in AI infrastructure and products. The company has committed tens of billions of dollars toward expanding data centres and AI capabilities, even as it seeks efficiencies across the business. Analysts have increasingly linked workforce reductions across the technology industry to companies reallocating resources towards AI investments, although Microsoft has maintained that the current restructuring is organisational in nature.

Xbox embarks on biggest restructuring in its history

One of the biggest impacts of the restructuring will be felt inside Microsoft's gaming business. In a separate internal email shared publicly by Xbox president Asha Sharma, the executive described the move as "the most significant restructure in Xbox history."

"We are beginning the most significant restructure in Xbox history," Sharma wrote. "After careful consideration, I've made the difficult decision to reduce our team by approximately 3,200 throughout FY27. This will include approximately 1,600 role eliminations today, and in addition, four studios will leave Xbox to new management." Sharma said the restructuring would take place over the course of the financial year rather than in a single round. "I recognize that a year-long restructuring creates additional challenges. Unfortunately, it is not possible to make all the necessary changes in a single day, and I wanted to be direct about the scale."

Addressing affected employees, Sharma said the decisions were not a reflection of their performance. "I know this is painful. These changes will directly affect people who have poured their creativity into building Xbox... Today's decisions do not reflect their talent or dedication." The memo lays out a detailed explanation for the overhaul, arguing that Xbox's underlying economics have deteriorated despite years of acquisitions and investment.

"Our business today is not healthy. We are operating at margins that are 3–10 times lower than comparable platform and publishing businesses," Sharma wrote.

She added that Xbox entered the current console generation with "a smaller install base and a higher cost structure," while investments in Game Pass, multi-platform publishing and a broader portfolio of content "did not grow at the pace we expected."

"As that happened, our core business weakened, and we added more teams, more investment, and more time, hoping for a better outcome. And now the industry is facing the most severe hardware crisis in its history. We must reset Xbox." As part of that reset, Microsoft will shrink its first-party studio portfolio. Sharma said Compulsion Games and Double Fine Productions will become independent studios again, while Ninja Theory and Undead Labs are expected to move under new ownership with funding to continue development of Senua and State of Decay 3. In France, Arkane has begun consultations with its Works Council over strategic options.

She noted that while reductions would affect teams across Activision, Bethesda/ZeniMax, Blizzard, King, Mojang and Xbox Game Studios, "none of our first-party publicly announced games or projects are being cancelled" as part of the restructuring.

Beyond studios, Sharma said Xbox's platform organisation had become overly complex. "Today, in some parts of the company, work passes through as many as 14 layers of management." She added that platform teams are now "40% larger than they were at the start of this generation, even as our player base and playtime have declined." To address that, Xbox plans to reduce management layers to no more than five, and where possible three, while simplifying internal operations through shared services, cleaner codebases and a 50% reduction in vendor spending.

The restructuring will also introduce a new operating model. Helen Chiang has been promoted to the newly created role of Chief Operating Officer with end-to-end profit-and-loss responsibility across content, hardware, platform and services. Framing the changes as a long-term reset rather than a retreat, Sharma said Microsoft intends to continue investing heavily in gaming. "These changes are about a bigger future for Xbox, not a smaller one."

"This year, we'll invest as much in Xbox as we ever have, but we'll invest with greater focus, greater discipline, and greater clarity."

Sharma concluded by saying Xbox aims to "return to growth in 2027", adding: "History is full of companies that mistake longevity for inevitability. We will not be one of them."