Xbox CEO Asha Sharma issued a dire warning to staff on Monday: "Our business today is not healthy. We must reset Xbox."

Sharma's memo, first published on the Xbox website, announced cuts of 3,200 jobs tied to Microsoft's Xbox division, or equal to about 20% of staff, as deteriorating margins and disappointing Game Pass subscriptions have forced the unit into a major restructuring effort.

The 3,200-job reduction will be split into two waves: the first 1,600 layoffs will begin this week, with another 1,600 occurring over the rest of the fiscal year, according to the memo.

Last month, Sharma told employees in another memo that Xbox's "accountability margin," the metric Microsoft uses to reflect profit margin, had slipped to 3% and that annual revenue had tumbled to alarmingly low levels. "Going forward, this cannot continue," she wrote then.

The CEO said:

She provided color on restructuring across Xbox's content portfolio:

The changes at Xbox come as the broader video game industry remains stuck in a post-pandemic slump. Compounding the pressure is the memory-chip squeeze, fueled by AI data-center demand, which has pushed console production costs higher and forced both Xbox and PlayStation prices to climb.

The release of GTA VI, now about 135 days away, cannot come soon enough. WallStreet analysts expect the blockbuster launch to drive a new wave of console demand and potentially produce some tailwinds for the struggling gaming industry.