Passkeys have been around for some time, but enterprise-wide adoption to this point has been slow for a number of reasons. But soon, many Microsoft customers won’t have a choice.

Starting September 1, Microsoft will roll out passkeys as the default authentication method in its cloud-based identity and access management (IAM) service Entra ID. And following a transition period, Microsoft-provided SMS and voice authentication will officially end on February 1, 2027.

With this move, Microsoft seems to be underlining the urgent need for a more secure authentication standard, as attackers up their game with AI.

This is an “important milestone,” because it moves passwordless authentication from an optional security enhancement to the expected standard, noted Ensar Seker, CISO at SOCRadar. “That shift is significant as attackers increasingly rely on AI to automate phishing campaigns, generate convincing login pages, and conduct large-scale credential theft.”

Microsoft’s six-month passkey roll-out

Passkeys require users to authenticate via a fingerprint, facial scan, or lock screen mechanism, rather than a password. They can be stored on physical USB keys (like YubiKey), or as digital credentials on computers, phones, or in cloud accounts.

This method, Microsoft contended, reduces reliance on phishable authentication tools like SMS and voice, and hardens protection against credential theft.

Passkeys “work better for users and worse for cyberattackers,” Nadim Abdo, Microsoft corporate VP for identity and network access engineering, wrote in a blog post.

Microsoft’s announced timeline for rolling out passkeys is relatively aggressive:

• September 1, 2026: All SMS or voice-enabled users will be “auto-enabled and nudged” to register a passkey upon multifactor authentication (MFA) sign-in.
• September 18, 2026: Pricing, commercial terms, and a list of supported telecom providers will be shared for scenarios that still require SMS or voice authentication due to regulation or technical or operational challenges.
• October 30, 2026: Enterprises still using SMS and voice must select and configure a supported telecom provider through the Microsoft Security Store. From then on, they will be responsible for any telecom-related costs.
• February 1, 2027: Microsoft-provided telecom delivery for SMS and voice authentication ends as a native Microsoft Entra capability.

After February 1, enterprises that require SMS or voice for MFA must register a passkey before sign-in. There will be no opt-out option.

It’s important to note that these dates apply to public cloud-hosted Entra ID. Support for other cloud environments will follow a separate timeline; additional guidance and dates are to come.

While SMS and voice have served their purpose well, Abdo said, bringing MFA to billions of users who otherwise would have had none, the threat environment has changed in “speed, scale, and sophistication,” necessitating this move to passkeys.

The benefits of passkeys

SOCRadar’s Seker pointed out that passkeys fundamentally change the attack surface because, unlike with passwords, there is no transmission of shared secrets that can be stolen by threat actors. Authentication requires possession of the user’s device, along with biometric verification or a PIN.

“Even highly convincing AI-generated phishing pages cannot simply trick users into handing over a passkey the way they can with passwords or one-time codes,” he said.

So why haven’t we seen widespread enterprise adoption? Identity ecosystems are “fragmented,” Seker noted, and many enterprises still rely on legacy applications that only support passwords. They also struggle with cross-platform compatibility, lifecycle management, recovery processes, shared accounts, and employee onboarding and offboarding.

Further, “until recently, many organizations viewed passkeys as a consumer technology rather than an enterprise identity strategy,” he said.

Microsoft’s move changes that equation, because Entra sits at the center of many organizations’ identity infrastructure, Seker noted. Default settings are typically the strongest drivers of security adoption, so when passwordless authentication becomes required rather than optional, organizations are far more likely to deploy it at scale.

Its biggest benefit would be a “dramatic reduction” in credential-based attacks, Seker said. He pointed out that most successful compromises still begin with stolen credentials obtained through phishing, infostealer malware, password reuse, or adversary-in-the-middle attacks. Passkeys “eliminate or significantly reduce” many of those attack paths, while reducing password fatigue and the help desk costs related to password resets.

In addition, rather than trying to continuously improve users’ ability to detect increasingly sophisticated phishing attempts, passkeys remove the credential from the equation altogether, Seker noted. “That represents a more sustainable long-term security strategy than relying solely on user awareness training.”

Still, passkeys are not a silver bullet, as they do not stop endpoint compromise, session token theft, malicious insiders, or attackers who already have control of a trusted device. Enterprises must complement passkeys with endpoint protection, continuous monitoring, conditional access policies, and identity threat detection, Seker advised.

How enterprises can prepare

To prepare for the shift to passkeys, Microsoft advised enterprises to review their authentication policy and identify the groups still using SMS or voice authentication. They should then select the best authentication method for user devices and workflows, and ensure all employees are given passkeys and security keys.

Entra ID supports both synced passkeys (those stored in platform credential managers like iCloud Keychain and Google Password Manager), and device-bound passkeys such as Microsoft Authenticator passkeys, Entra passkey on Windows, or FIDO2 security keys.

Seker advised enterprises to evaluate support for FIDO2 and passkeys across their identity infrastructure, and to develop clear enrollment and recovery procedures. They should also educate users on what’s changing, how passkeys work, and how they can complete registration. Further, Seker said, it’s important to establish secure device management practices and to continue enforcing least privilege, conditional access, and risk-based authentication policies throughout the transition.

Ultimately, he pointed out, the move is crucial. “Over the next several years, organizations that continue relying primarily on passwords will likely face higher operational risk as AI continues to lower the cost and increase the effectiveness of credential-based attacks,” he said.

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.