Autumn Mitchell has been an avid gamer since she was gifted a Super Nintendo at 5 years old.

“ I played Donkey Kong Country, and I was absolutely obsessed,” she said. “Video games have been a refuge for me. They have been a place to escape and to fantasize and to dream.”

Then, about five years ago, a new dream came true. Mitchell was hired by Microsoft subsidiary ZeniMax to test video games.

“ I scored the dream job…and just absolutely loved it, the people, the industry, the work itself is really dynamic and challenging, and it’s always changing — just really fulfilling stuff.”

But this week, that dream came to an end. Mitchell was one of thousands Microsoft laid off as part of a big reset of its gaming division.

Between layoffs and spun-out studios, Microsoft plans to reduce Xbox by 3,200 jobs over the next fiscal year. The company is calling it “the most significant restructuring in Xbox history.”

“ I would say it’s like having the wind knocked out of you, and you never really get your breath back,” Mitchell said.

She’s not optimistic she’ll find another job in gaming. The industry has always had boom and bust cycles. Studio staff are up to build a new game, but there can be a long lag time until the next one. Often there’s not enough money to bridge the gap.

But experts say this moment is different. Gaming companies are fighting social media, AI, and so many other drags on users’ attention.

“The more our time gets divided up, the less time we have to spend on gaming, and therefore, the less money we’re inclined to spend on gaming,” said Gil Luria, head of technology research at the investment bank brokerage D.A. Davidson.

Microsoft says the number of game players and playing hours are down. And Xbox has been spending billions on studio acquisitions, some of which were flops. In a memo to employees, Microsoft said the business has become unhealthy, with profit margins three to ten times lower than competitors.

KUOW asked Microsoft President Brad Smith about the prospect of layoffs in an interview last week, and he said even though these decisions aren’t easy, “You do have to remain healthy in order to be successful, even to just stick around from decade to decade to decade.”

If the gaming industry was facing an uphill fight before, soaring hardware costs turned it into an epic battle.

“The current layoffs are an unfortunate mix of both internal inefficiencies and…this apocalyptic degree of hardware prices going up because of the AI frenzy,” said Joost van Dreunen, a professor at New York University who teaches the business of video games.

According to van Dreunen, a combination of tariffs, increased fuel prices, and — most importantly —surging demand for chips is eating into Xbox’s margins.

“ And that’s a scenario in which the easiest answer is to just cut jobs, as unfortunate as that is for everybody involved,” he said.

Some rank-and-file Xbox employees, like Mitchell, think leadership’s efforts to course-correct are misguided. They believe turning things around will require listening to the people making these games, not firing them.

Christopher Hays has been working on games like Doom and Rage for id Software for 16 years. It was acquired by Xbox in 2021. Hays hasn’t been laid off yet, though he worries he could be. He thinks the problem is comparing Xbox with higher-margin parts of Microsoft’s business, like software and AI.

“ Gaming makes a lot of money,” he said.

But not AI money.

“Most of the time when there’s a lot of money lost, it’s people in power chasing a trend…and then ignoring developers who actually know the industry, are gamers themselves, and know what people want.”

Hays would like to see Xbox spun out of Microsoft. Some gaming experts say that may ultimately be where all of this is headed.

“ That’s where I see the future for Xbox in the next two years,” van Dreunen said. “We’ll hear in the next 12 to 24 months if that’s going to be a reality. But a breakup of Xbox into smaller subcomponents and a sell-off of some of those, I think, is a likely future.”

Monica Nickelsburg is a reporter with KUOW.

This story comes to you from the Northwest News Network, a collaboration between public media organizations in Oregon and Washington.

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News Source : https://www.opb.org/article/2026/07/11/what-xbox-layoffs-massive-reboot-say-about-the-gaming-industry/