Microsoft's Xbox division is preparing for what could be one of its most significant restructurings in years after newly appointed Xbox CEO Asha Sharma warned employees that the gaming business has become "over extended" following years of heavy spending, declining revenue and mounting hardware pressures.
The warning came in a detailed internal memo co-signed by Xbox Chief Content Officer Matt Booty and published on June 10. While the document did not explicitly mention layoffs, Bloomberg reported that substantial workforce reductions are expected to begin in July, shortly after Microsoft's fiscal year ends on June 30.
The memo offers an unusually candid assessment of the challenges facing one of the gaming industry's most recognizable brands. Sharma told employees that Xbox's current financial trajectory is unsustainable despite serving more than one billion players annually across console, PC, mobile and cloud gaming platforms.
"We will end this fiscal year at about a 3% accountability margin, down year-over-year," Sharma and Booty wrote. "Excluding Activision Blizzard King, over the past five years, we have spent over $20 billion on ongoing investments in our content, platform, and hardware subsidy, but our annual revenue has declined nearly half a billion during that time. Going forward, this cannot continue."
The figures underscore a growing disconnect between Xbox's scale and its profitability. Despite billions of dollars invested in game development, subscription services and hardware, the business has struggled to translate that spending into meaningful revenue growth.
Recent financial results highlight the pressure:
- Gaming revenue fell 7% to $5.3 billion in the quarter ended March 31.
- Xbox hardware revenue dropped 33%.
- Content and services revenue declined 5%.
- Annual revenue has fallen by nearly $500 million over five years despite more than $20 billion in investment.
The company's hardware business appears to be facing particularly severe challenges. Sharma described what she called a "hardware component crisis," saying storage costs have risen dramatically since she took over the division in February.
"When I joined as CEO in February, the price we paid for console storage components was over 2x as high as we paid last fall," Sharma wrote. "These costs have since doubled again."
The memo warned that component costs could exceed five times their level from just two years ago by the 2027 holiday season. Memory prices, Sharma said, are following a similar trend. The result is a supply constraint that has limited Xbox's ability to manufacture enough consoles to meet demand.
"We are currently unable to make as many consoles as players want to buy, and we need a new business model and partnerships for hardware as we remain committed to Helix," the memo stated.
The financial and hardware pressures have prompted a broader strategic reassessment. Sharma acknowledged that Xbox expanded its studio network aggressively to support multiple initiatives across subscriptions, cloud gaming and platform growth. In retrospect, she argued, the company stretched its resources too thin.
"We expanded our studio system when we needed a pipeline of content to meet multiple strategies across subscription, streaming, and devices," she wrote. "In the process, we have found ourselves over extended as we executed on changing strategies in a landscape of more readily available content."
That reassessment appears to be influencing Xbox's content strategy. During the Xbox Games Showcase, Sharma emphasized the importance of exclusive titles, confirming that major releases including Gears of War: E-Day and Clockwork Revolution would remain Xbox console exclusives. According to GeekWire, a PlayStation 5 version of the new Gears of War project had previously been under development before being canceled.
Despite the stark financial outlook, Sharma highlighted several areas of progress during her first 100 days leading the division. She said Xbox platform teams delivered more updates during that period than in the previous year combined, while Game Pass returned to growth after more than eight months of decline.
"Our Game Pass team set to work fixing our offering and after 8+ months of decline, our service has started to grow again," Sharma wrote.
Still, the memo repeatedly returned to a single theme: Xbox must fundamentally change how it operates. Sharma said the company faces increasing competition not only from rival gaming platforms but from every form of entertainment competing for consumer attention.
"We won't succeed by hiding hard truths, nor will we succeed by doing the same thing and expecting different results," Sharma and Booty wrote.
