TL; DR
Microsoft could drop, sell or restructure Xbox after margins fall to 3%. Major layoffs planned for July. No decision is inevitable.
Microsoft does not rule out turning the Xbox division into a separate company. Options being considered include turning Xbox into a wholly-owned subsidiary, forming joint ventures with outside partners or selling the business outright, the report said. No decision is imminent, but new Xbox CEO Asha Sharma and Microsoft CEO Satya Nadella have put everything on the table.
The background is financial. Xbox’s profit margin fell to 3% this fiscal year. The division has spent more than $20 billion on content, platform and hardware subsidies over the past five years, while annual revenue has fallen by nearly half a billion. Microsoft is also planning big cuts in July, with significant cuts to marketing and other budgets.
Structuring Xbox as a subsidiary would mirror how Microsoft treats LinkedIn and GitHub, both of which operate under their own leadership and brand identity. A joint venture or sale would be more dramatic, effectively ending Microsoft’s two-decade run as the console platform owner.
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Sharma, who took on the role in February, has received approval to invest heavily in tentpole franchises. Halo hasn’t had a new release since 2021. The last Fallout was Fallout 4 in 2015. It also confirmed that Gears of War: E-Day and Clockwork Revolution will be Xbox exclusives, reversing the company’s recent trend of putting games on competing platforms.
This investment in blockbuster titles will likely come at the expense of smaller studios and games that are unable to meet sales expectations. Microsoft and Meta are turning wages into AI capital expenditures within the company. The question is, can Xbox justify its resource demands when the rest of Microsoft is generating much higher margins from cloud and AI?
A spin-off would also recap the $69 billion acquisition of Activision Blizzard. Microsoft completed this deal to power the Xbox in 2023. If the unit is sold or divested after less than three years, it will raise questions about whether the acquisition thesis ever holds.
For now, Sharman’s strategy appears to be a last-ditch effort to make Xbox work within Microsoft: aggressively cut costs, focus on the biggest franchises and prove the division can be profitable. If that doesn’t work, the discussed structure offers options Microsoft’s management Xbox is ready to release.
