Metal–ceramic nanolayered composites have been reported to have high strength because of their effective confinement of dislocations at interfaces; however, this unfortunately results in unstable deformation due to the brittleness of the ceramic layer. This study explores the deformation behavior of a metal–ceramic nanolayered composite in which the ceramic layer thickness is varied to examine the effect of brittle-to-ductile transition of the ceramic layer. The thickness of AZO, which is theoretically expected to be ductile, is first fixed at 9 nm while varying the metal thickness. For further comparison, 150 nm Ag/120 nm AZO is studied, where the AZO layer is expected to be brittle. In-situ SEM pillar compression show stable deformation for samples with 9 nm thick AZO, in which co-deformation of metal and ceramic is confirmed by TEM analysis. A systematic increase in strength is observed with reduction of Ag thickness with stable plastic deformation for nanolayered composite with AZO thickness of 9 nm. For the 150 nm Ag/120 nm AZO, unstable deformation is observed in which brittle fracturing of the AZO layer leads to reduction in flow stresses or strain softening. Finite element analysis shows that the stresses in the Ag and the AZO layers reach the stresses required for co-deformation.