Xbox cutting 3,200 jobs, divesting from 5 studios including Canada’s Compulsion

Xbox is eliminating 3,200 jobs and divesting from five studios as part of a major restructuring.

In a memo sent to employees that was also published online, Xbox CEO Asha Sharma called this “the most significant restructure in Xbox history.” This includes 1,600 employees being cut today and another 1,600 over the next 12 months, which works out to 20 per cent of Xbox’s total workforce.

This is an important email I sent today to all employees at XBOX:

Team,

We are beginning the most significant restructure in XBOX history. After careful consideration, I’ve made the difficult decision to reduce our team by approximately 3,200 throughout FY27. This will include…

— ASHA (@asha_shar) July 6, 2026

Notably, this reduction in workforce will include the five studios departing the company, starting with Montreal’s Compulsion (South of Midnight) and San Francisco’s Double Fine (Psychonauts) now going independent. The teams will also receive runway funding and ownership of their games.

Compulsion has issued its own statement on social media. In it, Compulsion expressed gratitude for Xbox’s stewardship since its 2018 acquisition and promised to continue to “create unique games that tell important stories.” It should be noted that at least several Compulsion employees had recently confirmed their departure amid reports of Xbox’s plans to part ways with the studio, so it’s unclear how many staffers remain at the developer.

An important update from Compulsion Games. pic.twitter.com/V4yRkpshuk

— Compulsion Games (@CompulsionGames) July 6, 2026

Double Fine also commented on going independent, thanking Xbox and promising to share more news “soon” on what’s next for the studio.

pic.twitter.com/nGDG5ZDe7c

— Double Fine (@DoubleFine) July 6, 2026

Additionally, Xbox is selling developers, including Cambridge, England’s Ninja Theory (Hellblade) and Seattle’s Undead Labs (State of Decay), to undisclosed buyers. Notably, the plan is for these studios to continue their work with Xbox on the upcoming Senua and State of Decay 3, respectively. And finally, Lyon, France-based Arkane (Dishonored) is entering a consultation process to seek potential buyers, although Bloomberg notes this process could take longer due to French labour laws. It’s unclear, then, what this means for the studio’s long-gestating Marvel’s Blade game, which was revealed in 2023 but has gone dark ever since.

Xbox purchased all of these studios since 2018 as part of a wider acquisition spree within the company that included the landmark US$69 billion buyout of Activision Blizzard. The main goal behind all of this was to bolster Xbox Game Pass, but the service failed to grow in the way Xbox had hoped, leading it to axe thousands of jobs and cancel numerous projects over the past two years. To that point, Sharma confirmed in the memo that Xbox has typically been losing 64 cents to every dollar it invested in the business.

It’s unclear exactly where the rest of the layoffs will come from, though Xbox is expected to make cuts company wide. For context, Xbox still owns many studios, including one in Canada: Vancouver-based The Coalition, which is making October’s Gears of War: E-Day. Sharma did confirm, though, that Xbox as a whole is shifting focus to “higher priority projects.” This includes juggernaut properties like Call of Duty and Minecraft, as well as a major overhaul at Bethesda parent company ZeniMax to prioritize Fallout, The Elder Scrolls, Doom, Wolfenstein and Quake. There was no specific mention of how Blizzard, which makes games like Warcraft and Diablo, may be affected.

Sharma did also note that she wants Xbox to reach one billion players per day, a headcount she had just said last month was achieved per year. It’s unclear how Xbox expects to reach such an ambitious target, especially after cutting so much of its workforce.

The Xbox layoffs are part of 4,800 total layoffs across Microsoft. The company’s gaming, Windows and Surface divisions have been lagging, while its cloud and LinkedIn businesses have grown. But of course, Microsoft is perhaps best known in recent months for investing many billions into AI, even though this spending in general has resulted in widespread losses across the tech industry.

Image credit: Compulsion Games