Microsoft is considering spinning off Xbox entirely as the division’s margins hit 3%

Microsoft has not ruled out spinning off its Xbox division into a separate company. The Information reported that options under consideration include turning Xbox into a wholly owned subsidiary, forming a joint venture with outside partners, or selling the business outright. No decision is imminent, but new Xbox CEO Asha Sharma and Microsoft CEO Satya Nadella have left everything on the table.

The background is financial. Xbox’s profit margins collapsed to 3% this fiscal year. The division spent more than $20 billion on content, platform, and hardware subsidies over the past five years while annual revenue declined by nearly half a billion. Microsoft is also planning major layoffs in July, with significant cuts to marketing and other budgets.

Structuring Xbox as a subsidiary would mirror how Microsoft treats LinkedIn and GitHub, both of which operate with their own leadership and brand identity. A joint venture or sale would be more dramatic, effectively ending Microsoft’s two-decade run as a console platform owner.

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Sharma, who took the role in February, has secured approval to invest heavily in tentpole franchises. Halo has not had a new release since 2021. The last mainline Fallout was Fallout 4 in 2015. She has also confirmed that Gears of War: E-Day and Clockwork Revolution will be Xbox exclusives, reversing the company’s recent trend of putting games on competing platforms.

That investment in blockbuster titles is likely to come at the expense of smaller studios and games that failed to meet sales expectations. Microsoft and Meta have been converting payroll into AI capital expenditure across the company. The question is whether Xbox can justify its resource demands when the rest of Microsoft is generating margins many times higher from cloud and AI.

A spinoff would also reframe the $69 billion Activision Blizzard acquisition. Microsoft completed that deal in 2023 to strengthen Xbox. If the division is sold or separated less than three years later, it would raise questions about whether the acquisition thesis ever held up.

For now, Sharma’s strategy appears to be a last attempt to make Xbox work inside Microsoft: cut costs aggressively, focus on the biggest franchises, and prove the unit can generate returns. If that does not work, the structural options being discussed suggest Microsoft’s leadership is prepared to let Xbox go.