Microsoft Has Considered Spinning Out Xbox, Plans New ‘Halo,’ ‘Fallout’ Games

As Microsoft gets ready to overhaul its struggling Xbox gaming unit, it hasn’t ruled out spinning out or restructuring the unit as a wholly-owned subsidiary, which could make it easier to sell, or creating a joint venture with other partners, according to three people with direct knowledge of the discussions.

Microsoft doesn’t have any imminent restructuring plans, but those options are on the table, the people said. While Xbox CEO Asha Sharma is planning significant layoffs and other cost cuts, she also plans to boost spending on new Xbox games from its most popular franchises to excite die-hard fans, these people said.

In particular, Xbox will move faster on developing new games from beloved franchises it owns, including Halo, Fallout and Elder Scrolls, the people said. Fallout and Elder Scrolls are two particular areas of focus for Sharma given their iconic status in the gaming world and the fact that they haven’t produced new mainline titles since 2014 and 2011 respectively, the people said.

Sharma’s plan could put Xbox on track to spend more on game development in the coming fiscal year, which starts in July, than it did in the current fiscal year, two of the people said. At the same time, Sharma is planning to cut costs in Xbox’s less-popular game studios, which could make its overall game development budget roughly flat year over year, one of the people said.

Microsoft CEO Satya Nadella and Chief Financial Officer Amy Hood have approved of Sharma’s plan to spend more on top-tier games in the coming fiscal year beginning in July, although the budget is not yet locked in and could change, the people said.

The moves come as Sharma aims to get Xbox growing again. In an unusually candid move, Sharma publicly shared a memo she sent to staff Wednesday, saying that Xbox’s profit margins have fallen over the past year to just 3% and that revenue has fallen over the past five years, excluding the contribution from Activision Blizzard, a business Microsoft acquired for $75 billion in 2023. Sharma said that trend “cannot continue.”

Consumer spending on games globally has grown very slowly in the past five years, and barely at all for console games such as those that run on Xbox, according to data compiled by Matthew Ball. And Sharma said that Microsoft, like other console makers, are struggling with skyrocketing component prices.

Nadella and Hood haven’t ruled out restructuring Xbox’s relationship to Microsoft at some point in the future if doing so would make Xbox a more successful business, the people said. Options on the table could include making Xbox a wholly owned subsidiary of Microsoft, a joint venture or spinning out Xbox entirely, the people said.

Microsoft operates LinkedIn and GitHub as wholly owned subsidiaries, which could serve as one potential blueprint for Xbox, one of the people said.

For now, Nadella has signaled that he’s positive about Xbox’s outlook, saying at a Hard Fork Live podcast taping Wednesday that Sharma is “going to take a fresh look and make sure we deliver on what our fans expect of us.” He added: “We have to turn this into a sustainable business.”

The proposed Xbox game-development budget reflects Nadella’s commitment to continuing to invest in the unit despite its struggles, and pressure from some shareholders to sell or spin out the Xbox console business or the entire unit.

Sharma stepped into the CEO role in February after previously serving as a corporate vice president overseeing Microsoft’s GitHub Copilot and other AI developer tools. She’s now preparing layoffs and to reorder the way the unit funds its roughly 30 internal game studios. Her memo to staff this week explained that the company needs to cut excess costs even as it invests in other areas, including its “industry-defining franchises,” which it has “not adequately funded.”

She has also called for a bigger investment in Minecraft, one of the most popular online games of all time, which has fallen behind its competitor Roblox in daily average users, according to external estimates. Similarly, Sharma has said she wants to produce more games from Xbox’s Halo franchise—Xbox hasn’t published a major Halo title since 2021, while Sharma has told deputies the franchise should publish new Halo titles on a faster cadence, one of the people said.

It’s not clear whether Xbox’s overall budget will grow along with the new spending on game development. The size of Xbox’s operating budget in the coming year could not be learned, and Microsoft doesn’t break out the unit’s financials beyond revenue, which makes up about 7% of Microsoft’s overall revenue.

Improving Xbox’s margins has proven a difficult challenge for Microsoft over the past several years. Xbox had a 12% profit margin in the first nine months of its 2022 fiscal year, court documents revealed, compared to roughly 19% average profit margins across the gaming industry.

When Microsoft acquired Activision Blizzard in 2023, that studio had a 40% operating margin, and buying it helped improve Xbox’s overall margins, according to the person with knowledge of the business. Still, as of late 2025, then–Xbox President Sarah Bond set a goal of improving Xbox’s profit margins to 30%, Bloomberg reported at the time, only for it to sink to 3% this fiscal year.

“It’s clear [Xbox] costs are way too high, and the [coming] layoffs are going to be one way to get that in check,” Wedbush Securities Managing Director Michael Pachter said, noting that it would be wise for Xbox to increase its pace of producing games from its biggest franchises. “Where did all their games go?…Asha was put in there either to get rid of the business or fix it, and her actions so far show she’s trying to fix it.”