Microsoft to cut thousands of jobs as AI spending pressures mount

Microsoft plans to cut less than 2.5% of its workforce — thousands of roles across sales, consulting and its Xbox gaming division — as the company confronts investor unease over surging artificial intelligence spending that has dragged its stock down 19% in the past month.

"Xbox's current trajectory cannot continue," Asha Sharma, chief executive officer of Microsoft's gaming division, said in an internal memo to staff last month, according to a Quartz report. Sharma cited steep hardware component cost increases and declining revenue, noting that more than $20 billion had been invested in content, platform and hardware subsidies over five years while annual revenue shrank by nearly half a billion dollars.

The reductions, expected to be announced as early as next week, follow two rounds of cuts last year that eliminated roughly 15,000 positions. In July 2025, Microsoft cut about 4% of its workforce, or approximately 9,000 jobs, after eliminating 6,000 roles in May. A voluntary retirement program earlier this year offered buyouts to US employees at level 67 and below whose combined age and years of service totaled at least 70. About 7% of Microsoft's 125,000-strong US workforce were eligible, representing nearly 9,000 people, and roughly a third accepted the package, according to Business Insider. Some employees whose roles are eliminated in the current round may be offered alternative positions within the company rather than being let go entirely.

The layoffs come as Microsoft pours tens of billions into AI infrastructure. Cloud revenue surged 29% to $54.5 billion in the quarter ended March 31, and the AI business reached an annual revenue run rate of $37 billion, up 123% from a year earlier. Yet Microsoft's stock posted its worst monthly performance since the dot-com era, as investors question whether the capital expenditure will translate into sustainable returns. The company reported total revenue of $82.9 billion for the quarter, up 18% year over year, with operating income of $38.4 billion.

Xbox Faces a Structural Reset

The gaming division has been a particular drag on Microsoft's results. Revenue fell 7% to $5.3 billion in the March quarter, with hardware sales dropping 33% and content and services revenue declining 5%. Sharma, who took over as Xbox CEO earlier this year, co-authored a memo with Xbox content chief Matt Booty calling for a broad restructuring that includes potential marketing and budget cuts. The Information reported in June that Microsoft is also considering options for the unit, including a potential spin-off or restructuring as a wholly owned subsidiary. The Xbox cuts had been flagged for weeks after Sharma warned employees that the business cannot continue on its current trajectory.

AI Spending Creates a Cost Paradox

Microsoft's workforce reductions highlight a tension playing out across the technology sector. Companies are racing to build AI infrastructure — Microsoft's commercial remaining performance obligation surged 99% to $627 billion, pointing to strong future demand — while simultaneously cutting headcount to protect margins. Meta announced plans to cut 10% of its workforce earlier this year, and Amazon outlined roughly 16,000 job eliminations globally. The pattern reflects a broader recalibration: tech firms are prioritizing AI investment over headcount growth, betting that automation will eventually reduce the need for human labor in areas like sales and consulting. The UK Competition and Markets Authority in May opened a strategic market status investigation into Microsoft's business software ecosystem, examining whether practices such as product bundling and interoperability affect customer choice and competition.

Microsoft shares, trading at roughly 30 times forward earnings, have already priced in some margin compression from the AI buildout. But the scale of these cuts — the third major reduction in a year — suggests management sees a longer path to profitability than the market had anticipated. Investors will watch the July announcement for indications on whether further restructuring is planned as the new fiscal year begins.

This article is for informational purposes only and does not constitute investment advice.