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The question inside Microsoft used to be how to fix Xbox. Now it is whether to keep it. The company has considered spinning off its gaming business into a standalone entity, according to The Information, and the deliberations have intensified as Xbox revenue fell by $500 million and Microsoft prepared a new round of layoffs for July, reported by Tech Times.
The gaming unit’s troubles have a known shape. Microsoft paid $68.7 billion for Activision Blizzard in 2023, the largest acquisition in its history, betting that Call of Duty, World of Warcraft and Candy Crush would anchor a subscription-led gaming empire. The deal closed after a bruising regulatory fight, and the integration that followed has never fully settled.
The numbers since then have been sobering. Xbox hardware sales have fallen for years, and console sales dropped more than 30% year over year in the most recent quarters, according to industry trackers. The $500 million revenue decline cited in the reports reflects the slide across hardware, content and accessories. Game Pass, the subscription service that was supposed to be the future, is growing but has not replaced the revenue lost.
The revenue slide reflects a hardware cycle nearing its end. The current console generation is old, exclusive titles have been scarce, and Microsoft has spent the year discounting consoles to move inventory, analysts said. The next generation is still years away, and the gap between now and then is a long time to wait on a business that is shrinking in the present.
The July layoffs will compound the message. Microsoft cut thousands of gaming jobs in 2024, including closures of studios it had just acquired, and a fresh round in July, coming alongside talk of a spin-off, reads as a reset rather than a repair. The people whose work is being cut have been told the cuts are about efficiency; the context says otherwise.
The new leadership has been given a mandate to change course. Asha Sharma, who took over the gaming business, has outlined a plan that accelerates development of the company’s biggest franchises, including Fallout and The Elder Scrolls, the two properties acquired with Bethesda. The plan bets on the content, not the hardware, a direction that points away from Microsoft’s traditional console strategy.
The spin-off option is the most dramatic of the possibilities under discussion, according to people familiar with the deliberations. A standalone Xbox would raise its own capital, strike its own platform deals and stop competing for attention inside a company whose future is cloud and AI. For investors, the logic is clearer than for gamers: gaming has never fit the Microsoft model cleanly, its margins are volatile, its cycles are brutal, and its audience is not the enterprise.
The precedent question looms. Microsoft has rarely parted with major businesses. Satya Nadella, who has run the company for more than a decade, has been a buyer rather than a seller, spending more than $100 billion on acquisitions, and a spin-off of Xbox would be the largest divestiture of his tenure. It would also be a quiet admission about the Activision deal, the biggest purchase he ever made.
The gaming market itself is changing. Console sales are flat globally; the growth is in mobile, PC and free-to-play. Microsoft has already begun putting its games on rival platforms, releasing titles on PlayStation and Nintendo Switch, a strategy that undercuts the case for exclusive hardware. A spin-off would accelerate that logic: a standalone Xbox would sell its games wherever gamers are, without loyalty to Microsoft’s own console.
Regulators who spent years fighting the Activision acquisition would scrutinize any restructuring that moves gaming assets, antitrust lawyers said. The deal was approved with commitments, and unwinding it, or moving it, would reopen questions the company would rather keep closed.
A spin-off would also change the math for Game Pass, the subscription service with tens of millions of members. Inside Microsoft, Game Pass is a strategic asset tied to the cloud; outside, it would be a standalone business that must pay for content on its own, and whether the service survives a separation in its current form is one of the unresolved items in the deliberations, people familiar with the matter said. Whatever the outcome, the July layoffs will come first, and the people affected will not wait for the strategic debate to conclude.
A decision is not final. Microsoft has not publicly commented on the deliberations, and people familiar with the matter said the talks are at an early stage. But the direction is telling: after three years of trying to make the Activision deal work, the question inside the company has moved from how to whether. The answer, when it comes, will reshape not just Xbox but the console business it helped define.
