Microsoft is expected to lay off a lot of employees on July 6. We don’t have full transparency into the numbers yet, and we probably won’t even hear that or the full circumstances behind the layoffs even after Monday.
The game industry is pretty dark these days when it comes to transparency, but Microsoft signaled the layoffs are coming and the CWA union spoke up about how it should handle it. I interviewed some of those Xbox workers. Having looked at those sides and talked to others who understand the business, I think there are plenty of reasons for the company to hold back.
The situation is fluid. We hear there are five studios set for closure, or could be saved from closure by a sale: Arkane (Marvel Blade, Dishonored), Double Fine (Kiln, Keeper), Undead Labs (State of Decay 3), Compulsion Games (South of Midnight) and Ninja Theory (Senua). On top of that, there are expected to be percentage cuts across other studios. (Obsidian is not one set for closure, as feared).
On LinkedIn, Amir Satvat has posted an upcoming session on how Xbox folks can try to find jobs. Based on talking to finance sources, I believe that there is interest in at least some of the studios that Microsoft wants to unload. The big question, of course, is the price and how long it will take to get deals done.
Overall, Microsoft has around 40 studios with more than 20,000 employees. Even without these studios targeted for shutdown, it will still have a huge business, as none of these are in the top 10. In her first hundred days, Xbox CEO Asha Sharma took decisive action on matters like getting rid of an unpopular ad campaign (“This is an Xbox”), cutting subscription prices and taking Call of Duty out of it, and keeping more exclusives for the the dedicated Xbox fans. But she saw a need to address bigger problems.
The negative picture
Without the financial transparency, it’s hard to fathom why the Xbox team believes it’s in a financial crisis, considering Microsoft can afford it. It is the fourth most valuable company in the world, with a valuation of $2.9 trillion.
The company generates hundreds of billions of dollars in revenue any given year, with Xbox accounting for maybe a tenth of that. This year, revenues for the fiscal year are expected to hit $327 billion, up from $280 billion a year ago. It has its Azure enterprise and AI business as its crown jewel, not to mention steady sales of Windows, Office, LinkedIn and more.
In the short term, Microsoft CEO Satya Nadella said the company has been supporting Xbox through good and bad years for 25 years, but he believes it should be “sustainable.”
Facing seven big “realities,” Xbox CEO Asha Sharma and No. 2 Matt Booty pointed out they needed to “reset” the games business. They noted they have strong franchises, but they are in competition for attention with not only games from the likes of Sony and Nintendo but also other forms of entertainment and more. They will end the fiscal year with a 3% accountability margin, down from a year ago.
Excluding Activision Blizzard King (acquired for $68.7 billion), they said they spent over $25 billion on ongoing investments in games as well as a hardware subsidy, but annual revenue has declined half a billion during that time. They said “going forward, this cannot continue,” but didn’t say why. They said they needed the pipeline of content to meet goals on subscription, streaming and devices, but they are now overextended. Now they have to reassess that investment for the next five years.
The Xbox leaders also said memory chip prices are five times higher than two years ago, affecting not only the profits of current hardware but also the prospects for the upcoming Project Helilx console. They said it’s taking too long to get games done given Microsoft’s own legacy systems and it has offloaded too many tasks to outsiders.
They didn’t mention that the Xbox Series X/S has been in a distant third place, selling 35 million or so consoles since 2019 compared to 93 million for the Sony PlayStation 5 and 175 million for the Nintendo Switch and Switch 2 combined. Steam is also making headway with perhaps five million Steam Decks sold, not to mention its just launched Steam Machines.
For sure, Microsoft should continue to be careful with spending and make sure it provides the supervision across the portfolio of studios to ensure that spending and schedules aren’t out of control. Yet it has already had four major layoffs in the since acquiring Activision Blizzard in 2023, shedding thousands of Xbox employees.
One of the big reasons for viewing this in a negative way is that Microsoft leaders probably expected better results from strategies that haven’t panned out yet, like the Xbox Game Pass subscription, which had to face a price cut and pull Call of Duty out of the base subscription. The results for cloud gaming and mobile games also haven’t moved the needle. At the same time, Microsoft has had to raise engineering costs to get Project Helix ready, and it has even taken the unheard of step (like Sony and Nintendo in the tariff era) of raising hardware prices, most recently by up to $150 — the third time it has done so.
The case for holding the course
For sure, AI is Microsoft’s cash cow. But it’s a cash cow without a soul, competing other cash cows of OpenAI, Anthropic, Google and Meta. By comparison, Xbox has the dedicated fan base of gaming, and gamers are engaged like no other form of fandom. It is the way that Microsoft truly reaches the hearts of consumers, not through necessities like Windows, Office or even CoPilot. The layoffs are causing damage to the long-term Xbox brand.
Much of this worry is founded in short-term thinking and temporary circumstances. Microsoft has plenty of huge franchises to support its “tentpole” strategy, where the major hits raise the tent so high that there is plenty of room to support smaller experimental games.
The best game studios take multiple years to cook games properly, as they’re not like other kinds of products as there is so much artistic work involved. Games also need to be vetted with players to see if they’re on the right track, and they have to be revised regularly in response to feedback.
So even the best studios aren’t able to produce a solid game every single year to please financial analysts. By their very nature, games require patient capital and trust in teams. Game developers need a stable environment where they can be creative and shoot for the moon, which is necessary when 20,000 games come out a year on Steam alone.
The smaller games can often lose money and generate too little revenue, but they are often key to providing new original intellectual property, which is critical to the future in establishing new franchises that can offset the decline of aging ones. Any company with the strategy of investing only in its current hits is doomed to a long decline.
You can expect that AI will change much of the picture for game development, with improvements in productivity that could speed creation and lead to permanent reductions in team size. But few believe that time is already here.
In its previous quarterly report, Microsoft said revenues for Xbox were down 7%, but it also noted it was setting records for monthly active users. It foresaw a revenue decline in content and services in the low teens.
Activision had a weak year with Call of Duty: Black Ops 7 year, as it faced serious competition from Battlefield 6 and the brand-new franchise ARC Raiders. It won’t face the same competition this year on that front, and this year’s Call of Duty: Modern Warfare 4 is expected to be a much better game coming from the Infinity Ward studio as the lead. Call of Duty needs sustained investment as it takes around 3,000 or more people a year to make annual games. And this year, Activision is adding Call of Duty to the Nintendo Switch 2 platform.
For sure, Call of Duty will face serious competition this year from Grand Theft Auto VI, a game that has been in the works at Rockstar for around 13 years or so. It debuts like a juggernaut on November 19, 2026, and almost no other games are competing with it that month. But Microsoft gets a share of that business, as it will be published on Xbox platforms. Such a third-party game could lift Microsoft’s sales this year in the critical holiday season.
There are levers Microsoft can pull to lower hardware costs and improve its reach with games. It could pull out optical drives from the system and get rid of physical distribution of disks. The disks have been a source of piracy and used resales that generate no money for game makers or Microsoft. Aand the drives add cost and bulk to the game consoles. Of course, many gamers still get their games in a physical format, and they love it. Sony’s own move in this direction has triggered a backlash from fans. So this move could be damaging, but the point is to show players that they can get a lowert price for their hardware with this sacrifice.
Where to invest?
For sure, Xbox should invest in its core franchises, and it’s doing so in spite of these layoffs.
On the side of improving reach, it could launch a cloud-based gaming solution with little physical hardware (bypassing the expensive memory costs). This could be an ad-supported service with a low subscription price that could work with games hosted in the cloud and displayed only on connected TVs — which number more than a billion now. Hardcore gamers haven’t opted for this kind of service yet, but faced with $1,000-plus consoles, they might now.
If that isn’t appealing enough on the cost front, Microsoft could also launch a hardware device in the $300 price range — a price that many more households can afford — or it could acquire Nex, maker of the motion-sensing console Nex Playground. This is the gaming for the people approach, rather than appealing to hardcore gamers with cool but expensive hardware.
Microsoft could also make a bigger push into mobile games and set up a better direct-to-consumer store to capture margins. Most children are getting their start with games on phones now. It could also turn its cash cow Minecraft into a game platform that is more like the user-generated content platforms of Roblox and Fortnite — where the kids are congregating. Netflix is among the companies investing heavily in games played on TVs with remote controls or smartphones. Some kind of hybrid of the smartphone with other platforms seems like it could reach more people who aren’t players now.
For sure, Microsoft could spread its forces into the rest of the world and hire low-cost game developers and outsourcing companies.
It can operate studios more inexpensively with remote work — something its unions have been asking for — and yet that doesn’t mean that the veterans in high-cost areas are disposable. The CWA union workers I interviewed made the case for understanding how worker morale and inspiration matter. Phil Spencer, Microsoft’s previous Xbox CEO, pointed to how Double Fine’s creativity inspires other game developers to take risks.
Lastly, as I’ve said many times, games can rise from subculture to mass culture, and in doing so win the attention war against the addiction industries like gambling, social media, social video, AI companions, prediction markets and porn. Games can do this by staying squarely in the realm of fun, and moving into other entertainment like YouTube, TikTok, movies, TV shows and more. Like with the game of civilization, games can win the culture war.