Xbox faced a tumultuous July, marked by significant layoffs and studio divestitures. On July 6, Microsoft announced the elimination of 3,200 jobs within its Xbox division, with half occurring immediately and the remainder spread over the coming year. This move impacted various levels, including renowned studios like id Software and Obsidian Entertainment, with multiple projects reportedly canceled.

This "reset" for Xbox, as described by CEO Asha Sharma and chief content officer Matt Booty, stems from dire financial realities. A June memo highlighted declining annual revenue despite substantial investments, leading to a mandate for simplification and reduced management layers. The company also divested four of its acquired studios, including Compulsion Games and Double Fine, though the future of Arkane Studios remains uncertain.

The layoffs and studio shakeups drew criticism from union members, who accused Microsoft of unfair labor practices and prioritizing profits over people. Lawsuits were filed, and protests organized. Further compounding the difficult month, Xbox experienced a network outage and reported a 10 percent revenue decline for Q4 2026, falling behind PlayStation. These events follow years of smaller layoffs and acquisitions that have been questioned for their focus on potential revenue over creative output.