Microsoft's gaming division is running on a 3% profit margin, revenues are down nearly $500 million from five years ago, and the company is finally saying so out loud.
Xbox CEO Asha Sharma and Studios chief Matt Booty sent a memo to employees Wednesday, published publicly on Xbox Wire, declaring a wholesale "Xbox reset." The message describes the division as "over extended," attributing the strain to the $69 billion Activision acquisition layered on top of $20 billion in additional deals, platform investments, and hardware subsidies over the past five years. That 3% margin is below the game industry average and far short of the 30% Microsoft is reportedly targeting across its businesses. Despite roughly $89 billion spent on gaming, revenues have still fallen nearly $500 million compared to five years ago.
The public candor is notable. Microsoft spent years framing Xbox as a long-term growth play, leaning on Game Pass subscriber counts and multi-platform expansion to tell a story about the future. This memo is the income statement's rebuttal to all of that. If the Activision deal was supposed to transform Xbox's competitive position, it has not yet shown up in the margins.
Sharma took the CEO role just 100 days ago, replacing long-serving executive Phil Spencer. Calling something a "reset" is the easy part; explaining what actually changes next is the harder one.