Sharma unveiled sweeping changes at the gaming unit Monday, primarily layoffs that will affect roughly 3,200 people, or 20% of staff—1,600 employees will be affected immediately, and the other 1,600 are expected to be cut over the next year. The cuts are part of a broader workforce reduction at Microsoft announced Monday that is expected to impact about 2% of its 228,000 employees. Xbox is also spinning off four of its studios.

“In order to grow, we made a bunch of bets … and as we did that, we inherently didn’t focus on the core business,” Sharma told Fortune. “The number one measure of your strategy is what you put your resources behind, and we simply spread ourselves too thin.”

The unit’s new plan centers on returning focus to its flagship Xbox console, which represents 80% of its business, funneling its content budget toward high-growth areas such as the Minecraft game, and stepping away from smaller studios. It is also moving from a decentralized studio model to a more centralized one, and will strip out management layers.

For the first time, Xbox is also installing a chief operating officer, Helen Chiang, who will be accountable for profits and losses across its content, hardware, platform, and services businesses. Major assets such as Candy Crush-maker King and Minecraft-maker Mojang Studios will now report directly to Sharma.

A major restructuring at Xbox has been expected for months, as losses have mounted amid a cascade of issues and competition that has eaten away at its market share. Microsoft reported a 7% decrease in quarterly gaming revenue in its latest financial report, driven by a 33% drop in Xbox hardware revenue and a 5% decline in Xbox content and services.

In a June note to employees, Sharma signaled that major changes were coming. She said that despite investing over $20 billion in content and hardware over the past five years (excluding Activision Blizzard), annual revenue has declined by nearly half a billion dollars. On Monday, she told employees in a memo that Xbox’s operating margins are three to 10 times lower than comparable businesses.

Sharma said Xbox needs a new business model, and that it has been battered by surging component costs, overextending its studio system, underfunding its popular franchises, and relying too heavily on vendors instead of fostering a self-reliant engineering culture.

Sharma has also said the costs of certain console components will keep climbing.

“A healthy Xbox could weather the shock of the hardware crisis. With an unhealthy Xbox, it becomes really challenging, and it accelerates a lot of the changes we need to make,” Sharma said.

Sharma has moved quickly since succeeding longtime executive Phil Spencer in February. She lowered Game Pass prices, cut the AI Gaming Copilot feature for consoles, scrapped old marketing campaigns, and revived exclusive titles such as Gears of War: E-Day.

Microsoft has in the past reduced headcount around the end of its fiscal year, which ended in June, but the Xbox changes represent a drastic shift in strategy at one of the company’s worst-performing divisions. Microsoft also eliminated about 15,000 jobs across the company in 2025. It’s been one of several tech companies to reduce its workforce while also building out expensive data centers to handle computing for AI services.

Investors have been eager to see Microsoft adjust to recent challenges. The company’s shares are down double digits over the past year, as investors have fretted over AI’s impact on software, Microsoft’s reliance on OpenAI for most of its AI cloud computing business, and its heavy data center spending.

Turning Xbox around will take time, Sharma said. She noted that executives are experimenting with new business models for hardware, including expanding consumer programs like “buy now, pay later” financing to lower the barrier to entry, and moving Xbox away from a strict, closed system. She also said Xbox must be available on mobile and PC to meet players where they are.

“I think our core has to be healthy, and that will be necessary but not sufficient,” she said.