Microsoft’s big lead over AI competitors like Google and others has vanished, and the company is now playing catch-up. As a result, Microsoft’s stock has tanked in the last year — down roughly 23% compared to a year ago, due mainly to its massive AI spending and an inability to monetize Copilot. 

The company clearly needs to do something. And last week it did, though not what you might expect. It laid off 4,800 people, a little more than 2% of its worldwide workforce, with its Xbox division hit hardest. And it’s not reducing its massive spending on AI data centers or other AI-related costs.

The New York Times explained the cuts this way: “It is Microsoft’s latest employee culling as it plows tens of billions of dollars into the infrastructure for building artificial intelligence.”

Was cutting back on gaming (while still going all-in on AI) the right move for Microsoft? To answer that, let’s take a look at the details of the company’s July layoffs.

A year of layoffs

The recent cuts come in the wake of larger Microsoft workforce reductions over the last year or so. In May 2025, the company laid off 6,000 employees, about 3% of its workforce. Then a few months later, it laid off 9,000 more, about 4% of its workers. In both rounds of cuts, the company’s gaming division was hit — though it wasn’t the primary target.

This year, in April and May, the company rolled out its first voluntary retirement program for US employees. Approximately 3,000 people took the money and ran.

Then came last week, when Microsoft primarily targeted gaming. When the cuts take full effect over the next year, 2,850 gaming employees will be let go. In addition, Microsoft is cutting loose several of its gaming studio brands, which will become independent companies or be sold to buyers.

The layoffs hit the two remaining gaming studios, Activision Blizzard, which makes the big-selling games Call of Duty and Candy Crush, and ZeniMax Media, which publishes series including Fallout and The Elder Scrolls. Three years ago, in 2023, Microsoft bought Activision Blizzard for $69 billion. That followed its purchase of ZeniMax Media in 2020 for $7.5 billion. Both seemed like sizable acquisitions at the time. 

Compared to Microsoft’s AI spending now, they’re chump change.

Follow the money

A memo sent to employees about the July layoffs by Amy Coleman, Microsoft executive vice president and chief people officer, made clear the layoffs were more about AI than they were about gaming. 

Of the cuts, she wrote: “The “why” is this: our business is changing because the world around it is changing. The way technology is built, deployed, and used is transforming faster than at any point in my time here. Our customers’ needs are shifting, the business models that serve them are shifting, and that means the work itself — what we do, where we focus, and how we’re organized — has to transform, too.

“Our customers are navigating this same shift, and they’re counting on us to help them through it.”

That last sentence is an oblique reference to the early July launch of the Microsoft Frontier Company, which will embed 6,000 engineers inside customers’ businesses to help them more effectively deploy AI. The cost: $2.5 billion.

That sounds like a substantial amount of money. But it’s only a drop in the bucket of how much money the company plans to spend on AI. In April, Microsoft told investors it would spend $190 billion on data centers and other AI infrastructure this year, a 60% increase over what it spent last year. At the same time, Microsoft said it would shrink its workforce.

Its latest layoffs are clear-cut evidence of that. It’s also evidence that the company recognizes how badly Xbox has performed, and that it needed to do something about it. 

In early June, Microsoft sent a memo to everyone in its Xbox division entitled “Next 100 Days: XBOX Reset.” The memo laid out the problems with its ailing game business and pulled no punches. It noted that beyond the $69 billion the company spent three years ago to buy Activision, “Over the past five years, we have spent over $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. Going forward, this cannot continue.” 

The layoffs and spinoffs were the first steps. They won’t be the last.

There’s no doubt this is just the beginning of Microsoft’s disinvestment in gaming. The issue isn’t just that the company’s investments haven’t paid off. It’s that Microsoft’s AI ambitions are so large and expensive that it can no longer afford to seriously fund gaming.

Ultimately, it was the right thing to do, at least from a business perspective. The future is AI. It’s not in gaming.

So, for the foreseeable future at Microsoft, when it comes to AI — the sky’s the limit. But when it comes to gaming, things look much less rosy.