Xbox's Year of Reckoning: A New Boss, 3,200 Cuts and Halo's New Home

In 1988, a college student named Phil Spencer started at Microsoft as an intern. Thirty-eight years later he walked out as the most recognisable executive in console gaming, and the business he left behind is being rebuilt from the floor up.

The rebuild has been fast. On February 20, 2026, Microsoft announced that Spencer was retiring and that Asha Sharma would become Executive Vice President and CEO of Microsoft Gaming. On July 6 she announced roughly 3,200 job cuts and the exit of four studios. On September 22 came a second wave: 268 more roles, a closure consultation at Ninja Theory, and the news that Activision will make the next Halo. And on October 28 the first quarterly numbers of the new era landed: Xbox revenue of $5.38 billion, down 2% on a year earlier.

A changing of the guard

Spencer spent 12 of his 38 Microsoft years running Xbox. He called the job "the privilege of a lifetime" and stayed on as an adviser through the summer. Xbox President Sarah Bond left the company in the same reshuffle.

Sharma is an unusual pick for a games chief. She had joined Microsoft about two years earlier, after senior roles at Instacart and Meta, and came from Microsoft's AI side rather than from a game studio. Satya Nadella introduced her as someone who "has helped build and scale services that reach billions of people." She reports to Nadella directly and oversees Xbox, Bethesda, Activision Blizzard and King.

The content side went to a familiar face. Matt Booty was promoted to Executive Vice President and Chief Content Officer, responsible for nearly 40 studios. In plain terms: Sharma runs the business, Booty runs the games.

July: "Not healthy"

Sharma's first big memo did not soften anything. She described the Xbox business as "not healthy", said its margins ran three to ten times lower than comparable platform and publishing businesses, and said Xbox lost 64 cents for every dollar it invested in its game studios in a typical year.

The plan that followed was the largest restructuring in Xbox history:

• About 3,200 roles, roughly 20% of the Xbox workforce, cut through the fiscal year, with about 1,600 going on day one as part of 4,800 layoffs across Microsoft.
• Cuts spread across Activision, Bethesda/ZeniMax, Blizzard, King, Mojang and Xbox Game Studios.
• Vendor spending cut by 50%, and management layers reduced from as many as 14 to no more than five.
• Helen Chiang, who led Mojang and Minecraft, promoted to a new chief operating officer role; 17-year veteran Dave McCarthy retiring.
• Xbox said none of its announced first-party games would be cancelled.

Then came the studio exits. Double Fine (Psychonauts) and Compulsion Games (South of Midnight) would return to their own management as independent studios and keep their original IP. Ninja Theory (Hellblade) and Undead Labs (State of Decay) were to move to new owners with funding to finish Senua and State of Decay 3. Arkane Studios in France, which is making Marvel's Blade, entered a legally required consultation with its works council.

Sharma framed it as a pivot, not a retreat: "These changes are about a bigger future for Xbox, not a smaller one." She also put a date on it: "We will return to growth in 2027."

September: the map is redrawn

The second wave was smaller in headcount but bigger in symbolism. Booty told staff the restructuring was "roughly three-quarter of the way through", and then redrew the studio map:

• Halo goes to Activision, where a new team will make the next game. A small Halo Studios group stays on to support current Halo products.
• Rare and World's Edge (the Age of Empires team) also move under Activision.
• Obsidian moves to Bethesda, where it continues Grounded and a Fallout project with Bethesda Game Studios.
• Playground Games and Turn 10 merge into a single studio focused on Fable and Forza.
• King absorbs Microsoft Casual Games, the home of Solitaire.
• Undead Labs separates from Xbox on terms similar to Double Fine's. State of Decay 3 will still launch on Game Pass on day one.

The saddest line concerned Ninja Theory. Booty said two separate agreements for the studio had fallen through, and Xbox began consulting employees on a proposed closure. The British team behind Heavenly Sword and Hellblade had been planning a standalone Senua game for 2027.

Arkane's fate is still open. In late October Microsoft extended the consultation by one month "as we explore options." French rules require large employers to consider alternatives before mass layoffs, which is why the process takes longer in Lyon than it does in Redmond.

October: the first report card

The quarter to September 30, 2026 was the first full one under the new structure, and it was better than feared, if not good.

By the numbers (July-September 2026):

• Xbox revenue: $5.379 billion, down 2% ($129 million) year on year.
• Xbox content and services: down 2%, from lower third-party software and Game Pass, partly offset by first-party growth.
• Xbox hardware: down 14% on lower console volume.
• Previous quarter: gaming revenue had fallen 10%, so the decline slowed sharply.
• Microsoft overall: revenue of $92.3 billion, up 19%.

CFO Amy Hood had guided for a mid-single-digit decline in content and services, so a 2% drop counts as a beat. Sharma highlighted records for Minecraft and World of Warcraft: Forever, double-digit growth in PC platform revenue and the best-reviewed Call of Duty in more than a decade. She also said console sales were limited by supply, not demand, and that Microsoft was expanding its refurbishment programme to get more consoles to players.

The weak spot is Game Pass. Xbox has given no subscriber numbers, and the subscription was named as one reason content and services shrank. For a company that built its strategy around a subscription for most of a decade, that is a quiet but important signal.

Why it matters

Xbox is doing something no console maker has done at this scale: admitting, in public, that the old model did not pay, and reorganising around profit instead of reach. Moving Halo to Activision is the clearest sign. The series that launched the brand in 2001 is now treated as a franchise to be managed by the group's most commercial studio, not as a sacred flag.

For players, the short-term picture is mixed. No announced games have been cancelled, and studios like Double Fine and Compulsion get a second life as independents (we look at that in our story on the studios leaving Xbox). But thousands of developers have lost jobs, and the closure of a studio as distinctive as Ninja Theory is a real loss.

For the industry, Xbox's reset is part of a wider pattern of cuts in 2026, which we tally in our layoffs round-up.

What to watch

• Arkane's decision. Whether Marvel's Blade finds a partner, a new owner or neither is the biggest open question.
• The remaining cuts. About 3,200 roles are due to go by the end of the fiscal year in June 2027; Booty put the process at three-quarters done in September.
• GTA VI on November 19. Grand Theft Auto VI launches on PS5 and Xbox Series X|S, and Sharma's own supply comments make the holiday console story worth watching.
• The 2027 promise. Sharma has said Xbox will return to growth next year. The next three quarterly reports will show whether the leaner Xbox can deliver it.