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Microsoft ended Summer Game Fest with the kind of splashy presentation fans expect from a major platform holder. Its annual June showcase was loaded with familiar favorites: Halo, Gears of War, Fable, a see-through Xbox, and a few welcome curveballs, including fresh Persona and Crazy Taxi projects. For a moment, it felt like a throwback to E3’s loudest years, when the games business seemed sturdier and big reveals could still feel like pop-culture moments.
Three days later, that celebratory mood shifted sharply. New Xbox CEO Asha Sharma reportedly cautioned that Microsoft’s gaming arm was headed for a “reset” that would involve “making hard choices.” Soon after, reports began circulating about expected layoffs, potential studio closures, and canceled games. Ninja Theory is said to be among the teams at risk, despite having just shown a new title at SGF. If those plans unfold as reported, Xbox could emerge looking dramatically diminished.
Nearly a quarter-century after Microsoft forced its way into the console market, its gaming division appears to be facing its most precarious stretch yet. The consequences of several costly strategic bets are likely to become even more visible in the weeks and months ahead.
The brand’s trajectory was not always so bleak. When the original Xbox launched in 2001, Microsoft looked capable of becoming a serious challenger to Sony and Nintendo, backed by deep pockets and a willingness to catch up fast. Landmark exclusives such as Halo and the forward-looking launch of Xbox Live helped establish the platform’s identity. But the Xbox One’s 2013 debut, weighed down by an awkward emphasis on television and broader entertainment features, badly damaged that momentum. The Xbox Series X / S era, with its often muddled messaging, only left the company further behind.
There are plenty of explanations for the slide, but one of the most consequential was Microsoft’s massive wager on subscriptions. The logic was understandable in theory: if Netflix and other streaming services could transform movies and television, perhaps a similar model could reshape games. Microsoft pursued that possibility aggressively, spending billions to buy studios and publishers in hopes of building a Game Pass library big enough to keep players subscribing.
Game Pass did gain early traction, but its growth eventually slowed, leaving Microsoft with an enormously expensive strategy that failed to scale the way it had projected. The service has roughly 30 million subscribers today, far short of Microsoft’s earlier ambition to reach 100 million by 2030. At the same time, the “This is an Xbox” campaign pushed the idea that Xbox was no longer just a console but a broad ecosystem of Game Pass-ready devices — a message that made the brand feel even harder to define.
The scale of the problem was laid out bluntly in the “reset” memo from Sharma and Xbox chief content officer Matt Booty: “Excluding Activision Blizzard King, over the past five years, we have spent over $20 billion on ongoing investments in our content, platform, and hardware subsidy, but our annual revenue has declined nearly half a billion during that time. Going forward, this cannot continue.” Microsoft’s acquisition of Activision Blizzard King added another $68.7 billion to that total. After all that spending, the company has still managed to make the basic question — what exactly is an Xbox? — feel more confusing than ever.
This past February, there was a major shake-up at the Xbox division. Former boss Phil Spencer, who oversaw the brand through the Game Pass push and its many costly acquisitions, retired, while former president and COO Sarah Bond left the company. Despite some uncertainty around her lack of experience in the world of gaming — her prior role at Microsoft was head of the CoreAI division — Sharma’s early days provided some cause for optimism. She appeared willing to listen to fans on things like backward compatibility and exclusives, scrapped the unpopular Microsoft Gaming branding in favor of just Xbox, and moved the brand away from controversial AI features. She also made some strange and superficial changes, like restyling Xbox as XBOX.
But it’s clear the issues at Xbox run much deeper than a simple name change can fix. Sharma inherited a business that spent colossal amounts of money and had little to show for it, and now the bill is coming due. What makes this especially tragic is the sheer pedigree of the game studios that are being impacted. My colleague Tom Warren reported that Microsoft was mulling over closing at least five studios, which includes the likes of Arkane — best known for the wildly influential Dishonored series — and Double Fine Productions, a beloved team behind cult hits like Psychonauts, and more recently Keeper and Kiln. That’s multiple teams filled with talented individuals responsible for some of the most notable games ever made. Now they’re being discarded because of poor decisions they had no part in.
But even amid this apocalyptic landscape, Xbox’s issues feel particularly existential. Its hardware and subscription businesses are both faltering, and now it’s decimating its game development teams as well. Tom reported that the impending layoffs are expected to start next week, and it’s not clear yet just how widespread they will be. Part of the uncertainty is that we don’t know exactly what will happen to these studios; some may be hit with layoffs, some may be closed entirely, and some may be spun off as independent entities.
Whatever happens, though, Xbox will look drastically different once it’s all over. And given the dire state of console gaming, these might not even be the last changes for Microsoft’s gaming division.
- Sharma has done a lot of work to clean up the messaging around Xbox, but plenty of confusion remains, particularly when it comes to the company’s console exclusivity strategy.
- At the same time the Xbox is struggling, a new player is entering the space, as Valve launches the console-like Steam Machine.
- As always, Nintendo largely operates in its own parallel universe that has allowed it to largely weather the current storm.
- Bloomberg’s Jason Schreier has done some excellent reporting on the turmoil at Xbox, and has also helpfully condensed everything into a video on his YouTube channel.
- Matthew Ball is Xbox’s new strategy officer, and in an interview with The Game Business he explained how the brand is thinking about the next console, currently codenamed “Project Helix.”
- Speaking of execs, Booty talked to Game Informer following the SGF showcase to try and explain Xbox’s ever-changing strategy around exclusives, saying that “We want there to be a reason to believe and a reason to buy Xbox.”
