Microsoft (MSFT)-owned Xbox is one of gaming’s most established brands and is widely considered Sony’s chief rival in the gaming console segment.

After making its debut in 2001 with the launch of the original Xbox gaming console, the Xbox brand has spent the past twenty years building itself up as one of gaming’s household names.

Unfortunately, the company has struggled in recent years and has dragged Microsoft along with it.

In an attempt to address its problems, Microsoft has made changes to Xbox’s leadership, and more recently, has announced massive job cuts.

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Microsoft (MSFT)-owned Xbox is one of gaming’s most established brands and is widely considered Sony’s chief rival in the gaming console segment.

Microsoft’s gaming division launched in 2001 alongside the original Xbox console, which earned positive reviews from fans and gaming critics alike.

Building on this success, Xbox launched the Xbox 360 in 2005, competing against Sony’s PlayStation 3. Like its predecessor, the console received rave reviews and firmly established Microsoft as a household name in gaming.

Subsequent iterations followed in 2013 (Xbox One) and 2020 (Xbox Series X and Series S). Aside from selling gaming hardware, Xbox built its foothold in the industry through its first-party gaming studios, known for titles such as “Halo,” “Gears of War,” and “Forza Motorsport.”

Unfortunately, Xbox has struggled for over a decade and has fallen on even harder times recently.

Xbox has struggled since the pandemic-era gaming boom ended, dragging down Microsoft’s More Personal Computing segment over the past five years. After posting an operating margin of 33% in 2020, the segment’s margins gradually declined to just 26% in 2025.

According to Microsoft’s latest 10–Q filing, gaming revenue has dropped by 6% due to drops in Xbox hardware and content and services sales. Hardware sales dropped 31% while content and services saw a 3% year-over-year decrease.

These struggles have forced parent company Microsoft to undertake major restructuring efforts, beginning with a leadership change earlier this year.,Longtime Xbox CEO Phil Spencer retired, paving the way for Asha Sharma to assume the chief executive role.

More recently, Sharma has undertaken swift efforts in an attempt to streamline this flailing division within Microsoft.

Earlier this week, Microsoft announced it would slash 4,800 jobs, with 3,600 Xbox staffers bearing the brunt of the layoffs.

The sweeping cuts will be carried out in two phases, with Xbox axing 1,600 roles immediately and the remaining cuts carried out throughout the rest of Microsoft’s fiscal year.

Xbox will also divest four game studios while considering options for a fifth, which will eliminate an additional 350 employees.

This latest wave of layoffs follows a 2024 round that saw 2,000 job cuts and the closure of four studios.

Prior to Sharma’s leadership, Xbox’s core strategy revolved around Game Pass, a subscription service for gamers, and the acquisition of various gaming studios to beef up the service, an initiative carried out in the 2010s.

More recent acquisitions include gaming studios like Zenimax Media, owner of the “Fallout” and “The Elder Scrolls” IPs for $8 billion in 2020, and “Call of Duty” maker Activision Blizzard, for $75 billion in 2022.

Microsoft hoped that the inclusion of these games to its subscription service would help fuel subscriber growth for Game Pass, which in turn, would lead to higher sales for the Xbox brand overall.

But those hopes have yet to materialize. Today the company has around 30 million Game Pass subscribers, well short of the 77 million it targeted for this year.

The integration of acquired IPs into Game Pass also posed problems for Xbox. Instead of profiting from the highly lucrative “Call of Duty” franchise, the gaming division lost out on potential sales after new releases under the IP were initially included in Game Pass.

To recapture lost sales, new “Call of Duty” games were removed from Game Pass, forcing consumers to buy them instead.

Adding to the pressure on this division is the rising cost of memory storage chips brought by burgeoning AI spending, which has forced Xbox to raise the price of its gaming consoles between $100 and $150.

While Microsoft is determined to establish itself as a leader in the AI industry, it is being held back by its struggling consumer gaming business. And this is compounding investor fears about the company’s ability to come out on top in the AI race.

Microsoft’s Uniform P/E ratio sits at 19x today, its lowest level since 2018 and comfortably below its average 25.6x multiple it garnered between 2020 and 2025.

It remains to be seen how these restructuring efforts will pan out. But if Microsoft and Xbox’s new CEO can turn the struggling gaming division around, then it could help serve as a catalyst for the market to change its stance on the company.

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Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research