Microsoft's Xbox unit will cut 3,200 jobs through fiscal 2027 as its new CEO calls the business unhealthy. Some analysts argue Microsoft should sell the gaming division outright, even as the company insists Xbox is not for sale.
Microsoft's videogame business is dragging on its stock, and at least one analyst thinks the company should get rid of it. On Monday, new Xbox CEO Asha Sharma began cutting jobs, telling employees the unit would cut 3,200 jobs throughout fiscal 2027, including about 1,600 starting that day.
Sharma did not soften the message. According to Barron's: "Our business today is not healthy," she wrote in the memo. She said Xbox operates at margins 3-10x lower than comparable platform and publishing businesses, and that in a typical year the unit lost 64 cents for every dollar it invested.
Gaming shrinks as AI takes over
Gaming has become a small slice of a company built on software and cloud. Analysts expect Microsoft's gaming revenue shrunk 7.5% in the just-ended fiscal year, to $21.7 billion, according to Visible Alpha, roughly 7% of total sales. D.A. Davidson analyst Gil Luria said gaming has turned into a very marginal piece of Microsoft's growth strategy, if it counts at all.
The unit's weakness shows in the numbers. Microsoft reported in April that fiscal third-quarter Xbox hardware revenue declined 33% from the prior year, while gaming revenue fell 7%. Microsoft shares are down 21% over the last 12 months, and Wall Street lays some blame on Xbox.
Sell it, one analyst says
Luria argues the fix is a sale. He called gaming both gross dilutive and margin dilutive, and said eliminating such businesses serves shareholders. An Xbox spokesperson, meanwhile, told Barron's the unit is not for sale.
That could change. The Information reported last month that Microsoft was weighing options for Xbox, including a spinoff or a joint venture, either of which could make the unit easier to sell. Luria sees a path where an improved Xbox becomes an attractive target for private equity.
The turn is stark for a business Microsoft once bet heavily on. In 2022 it announced the Activision Blizzard acquisition, which cost about $70 billion and closed in 2023, among the largest tech deals ever. Now Microsoft is pouring capital into AI, and to Wall Street, Xbox reads as a distraction.
Source: Barron's
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