Microsoft is exploring structural overhauls to its Xbox division while shifting strategy to build more of its own AI capabilities instead of relying solely on external partners like OpenAI.

What happened: Microsoft is considering major changes to Xbox, including spinning it off as a separate entity, restructuring it as a wholly owned subsidiary, or forming a joint venture with outside partners. CEO Satya Nadella and CFO Amy Hood have also approved plans to increase spending on top-tier game development for the fiscal year beginning in July. This news follows reports of planned layoffs at Xbox next month and cuts to marketing budgets.

Why it matters: The moves signal Microsoft's willingness to reshape its gaming business if a sale becomes attractive, and reflect broader strategic shifts within the company. Separately, TD Cowen noted that Microsoft is moving toward building more of its own AI capabilities rather than relying heavily on external frontier labs like OpenAI—a shift the firm attributes to Microsoft's recent progress in its own AI stack, including advances in custom silicon and DIY applications. This suggests Microsoft is reducing dependency on outside AI partners.

What to watch: The final budget for game development spending has not yet been confirmed. The report also indicates that Microsoft has been quietly allocating GPU capacity toward internal research and development in recent quarters, a trend likely to continue as the company pursues in-house AI development.