Microsoft’s Xbox plans significant layoffs as it transforms under new CEO

[NEW YORK] Microsoft’s Xbox division is planning major layoffs next month, according to sources familiar with the company’s strategy.

The layoffs, the exact scale of which is not yet clear, are expected shortly after the close of Microsoft’s fiscal year on Jun 30, said the sources, who asked not to be identified because they are not authorised to speak to the press. Xbox is also planning to significantly slash budgets for marketing and some other areas of the business, the sources said.

A spokesperson for Xbox declined to comment.

This will be the first sweeping change under Asha Sharma, who became CEO of Xbox in February. Sharma has spoken publicly about the organisation’s challenges, saying recently at the Bloomberg Tech conference that she planned on “resetting the business”, which was “not in a healthy spot”.

In an e-mail to employees on Wednesday (Jun 10) seen by Bloomberg, Sharma wrote that the business had plummeted to a 3 per cent “accountability margin”, the metric Microsoft uses to reflect profit margin.

“Excluding Activision Blizzard King, over the past five years, we have spent over US$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,” she wrote. “Going forward, this cannot continue.”

Sharma added that Xbox would need to rebuild its platform infrastructure and rethink its portfolio in the weeks and months to come.

“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. We are the fortunate stewards of industry-defining franchises that have enormous potential and player demand, but we have not adequately funded them to compete and win.”

“At the same time, as we saw this past weekend at Showcase, a reliable pipeline of first- and third-party exclusives and new IP are critical to our success. We need to reassess the balance between these and our investment priorities for the next five years,” she added.

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Xbox, a titan of the video-game industry, has struggled to grow over the past few years. Sales at its hardware business have plummeted, it has failed to consistently deliver hit games and the popularity of its subscription service, Game Pass, has plateaued. Under pressure from its parent company to boost margins, Xbox has spent the past two years shuttering studios, cancelling games and raising prices.

In recent years, Xbox has released most of its software on rival consoles from Sony Group’s PlayStation and Nintendo, which helped games such as Indiana Jones and Forza Horizon reach far bigger audiences. But the move away from exclusivity may have damaged the appeal of Xbox hardware along the way.

Sharma is looking to reverse course. On Sunday, during a video presentation that showcased the company’s slate of upcoming games, she announced that Gears of War: E-Day and Clockwork Revolution will not come to PlayStation or Switch. In subsequent interviews, she and her executive team said they would handle future titles on a case-by-case basis.

A PlayStation 5 version of the new Gears of War game was in development and had been planned for release until Sharma changed tack, according to the sources familiar with Xbox strategy. Retailers had been preparing to open pre-orders for the PlayStation 5 version, and many Xbox employees were surprised by the announcement.

Sharma and her team also pulled a Halo trailer that was due to appear at a PlayStation event last week, potentially damaging the relationship between the two companies, according to sources familiar with the change of plans.

A return to exclusivity may excite diehard Xbox fans and improve prospects for the brand, but it also potentially means sacrificing a significant amount of revenue. The PlayStation 5 has sold more than 90 million units while analysts estimate that the Xbox has sold roughly one-third of that.

Sharma said at Bloomberg Tech that she is not under the same fiscal pressures from Microsoft as her predecessor, Phil Spencer.

“My mandate is not a 30 per cent accountability margin,” she said. “It’s not enterprise software margins. It’s to be the number one gaming and entertainment company.” BLOOMBERG