Microsoft CEO Satya Nadella has acknowledged that the company has spent years subsidising Xbox rather than generating significant profits from the gaming business, signalling that major changes could be on the horizon for the division.

Speaking during a recent recording of The New York Times’ Hard Fork podcast, Nadella addressed concerns about Xbox’s long-term future and the need for a more sustainable business model. His comments came just hours after Xbox leadership reportedly informed employees that a significant strategic reset is underway.

“No one can accuse Microsoft of not having invested for the last 25 years,” Nadella said when discussing the company’s gaming ambitions. “And now we have to turn this into a sustainable business.”

The comments provide a rare glimpse into Microsoft’s thinking about Xbox at a time when the gaming industry is facing rising development costs, increasing hardware expenses and growing pressure to deliver stronger financial results.

Nadella admitted that while Xbox has provided millions of players with entertainment over the years, Microsoft has struggled to effectively monetise that engagement. He even joked that Xbox games may be generating more revenue for creators on YouTube than they are for Microsoft itself.

The remarks followed an internal memo from Xbox CEO Asha Sharma, who reportedly warned employees that the division’s current level of spending and declining revenue cannot continue. Sharma, who has been in the role for around 100 days, revealed that Xbox is expected to finish the fiscal year with an internal profit margin of approximately 3%.

That figure comes despite Microsoft investing more than $20 billion into the Xbox business over the past five years. During the same period, annual revenue reportedly declined, raising questions about the long-term viability of the company’s current strategy.

According to Bloomberg, Microsoft is also planning significant job cuts within the Xbox division next month as part of broader efforts to improve profitability.

Nadella highlighted two key challenges currently facing Xbox. The first is a temporary issue affecting much of the technology industry: rising component costs caused by shortages of semiconductors and memory. These shortages have increased manufacturing costs across PCs, smartphones and gaming hardware.

The second challenge is more fundamental. Microsoft must determine what the future Xbox business model looks like and how it can generate stronger returns without alienating players.

When asked whether gamers should expect higher prices for consoles and games, Nadella stopped short of providing specifics. Instead, he said Microsoft needs to find ways to deliver games in a way that makes economic sense for both customers and the company.

Reports suggest Microsoft has not ruled out more dramatic structural changes. The Information recently claimed the company has explored options including spinning Xbox off into a separate business, creating a joint venture or restructuring it as a wholly owned subsidiary. However, no immediate plans have been announced.

For now, Microsoft’s focus appears to be on reducing costs while investing more heavily in its biggest franchises, including Halo and Fallout.

With a strategic review underway and further changes expected in the coming months, Xbox may be entering one of the most important periods in its 25-year history.