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We’re guessing the July 4 weekend was not too relaxed for some folks at Microsoft. Today we got news that the company is laying off 4,800 people—around 2% of its total workforce—mostly in sales and at its troubled Xbox business. It's also selling at least four, and probably five, small gaming studios. Asha Sharma, Microsoft’s new gaming chief, had foreshadowed the gaming cuts last month, and on Monday she doubled down on how bad things were at Xbox, declaring in a staff memo also posted on X that “our business today is not healthy.”
That’s a stunningly plainspoken statement in an industry where executives appear to be taught from the age of 5 to speak in meaningless jargon.
Including another 1,600 gaming jobs it will cut in the next year, Microsoft is cutting 20% of its gaming unit. Sharma also outlined various other steps she’s taking, including drastically reducing management layers. None of this will necessarily be enough to fix the business, however. The entire games market is struggling with anemic growth, and hardware makers such as Xbox also have been slammed by soaring component prices. And the gaming studios she is dumping were mostly not big operations.
Four of the five identified today were acquired in Microsoft’s fiscal 2019 year for less than $300 million, I’m told. (The fifth studio expected to be divested was part of Bethesda, acquired by Microsoft for $8.1 billion in 2021.) To put that spending into further perspective, Microsoft paid $27 billion to buy LinkedIn in 2016, $7.5 billion to buy GitHub in 2018 and $75.4 billion for Activision in 2023.
You might wonder why Microsoft is even talking about selling such small operations—other companies might get rid of them without saying a word. One explanation is that gamers are so touchy that a big company like Microsoft can’t do anything quietly with the gaming studios it owns. (For more on Microsoft’s gaming plans, see here.)
Another explanation might be that, having acknowledged the problem, Microsoft hopes it will get kudos for taking action to fix it. We might quibble with whether it is taking radical enough action, but Microsoft can still do more over time if it needs to. In the meantime, paring the portfolio will ensure Sharma’s team has more money and time to invest in games with better prospects. Assuming things improve, let’s hope she maintains her refreshingly candid way of communicating.
About That ‘Saaspocalypse’
There might be a reason why software stocks have collapsed 30% to 40% this year. In this article we published Monday morning, we cited examples of small businesses that are saving a boatload by replacing name-brand enterprise software with custom apps developed with help from AI.
Five startups and small companies said they had ended contracts with Salesforce and HubSpot over the past six months in favor of AI-created tools. If we can find five, there must be many more. On the other hand, ripping out established software systems is not for the faint of heart. While startups might be up for it, we’d bet that bigger companies will be resistant. Software investors, don’t panic. Yet.
In Other News
• Broadcom and Apple agreed to expand their “longstanding technology collaboration through 2031,” Broadcom said in a securities filing, adding that the companies had struck “new multi year” agreements for Broadcom to develop and supply custom chips for Apple to use in various products.
• Mercor hit over $2 billion in gross revenue run rate in June, double its pace earlier this year, according to a person with direct knowledge of the company’s financials. The growth comes from increased demand from AI app developers and Fortune 500 customers looking to build their own AI models or fine-tune existing ones, the person added.
• Singaporean prosecutors filed new charges against one of the suspects in a case related to smuggling Nvidia chips from the Southeast Asian country to other destinations such as China.
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Today on The Information’s TITV
Check out today’s episode of TITV in which we discuss the small businesses having great success using AI to replace expensive software contracts.
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