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How it started

Microsoft closed out Summer Game Fest with a bang. The company’s annual June showcase was packed with crowd-pleasers: Halo, Gears of War, Fable, a translucent Xbox, and even some pleasant surprises like new Persona and Crazy Taxi games. It was the kind of event that harkened back to the boisterous days of E3, when the industry was in a healthier place and game reveals were cultural events.

It was also a sham.

Just three days after the showcase, new Xbox CEO Asha Sharma warned of a “reset” at Microsoft’s gaming division, which would require “making hard choices.” The weeks that followed were filled with reports of impending layoffs, studio closures, and game cancellations. Ninja Theory is reportedly one of the studios on the chopping block, despite having just revealed a new game at SGF. If all this comes to pass, Xbox will be a shell of its former self.

After muscling its way into the console space nearly 25 years ago, Microsoft’s gaming division is at its lowest point ever. And the fallout from some disastrous decisions is going to get very ugly in the coming weeks and months.

It wasn’t always this way. With the arrival of the original Xbox in 2001, Microsoft seemed poised to be a viable contender in the space, with all of its resources helping it play catch-up with the likes of Sony and Nintendo. Major exclusives like Halo and a prescient foray into online play through Xbox Live helped to solidify this position for a time. But Microsoft flubbed the launch of the Xbox One in 2013 with an ill-fated push into non-gaming features like TV, and the brand has never really recovered. With the oft-confusing Xbox Series X / S generation, the company only fell further behind.

There are many reasons for this, but arguably the most damning was Microsoft’s extremely expensive push into subscription services. On paper it made some sense: Streaming services like Netflix were upending the film and TV landscape, so maybe the same could happen for gaming. Microsoft made some absolutely gigantic bets on this unproven future, spending billions of dollars to acquire studios and publishers in an attempt to build out a large library of content for Game Pass that would lure subscribers.

And while Game Pass proved popular initially, it ultimately plateaued, which meant that Microsoft spent all of that money on a business that didn’t grow anywhere near as large as it expected. (The service currently has around 30 million subscribers, while Microsoft had hoped to hit 100 million by 2030.) This misguided play also coincided with the “This is an Xbox” marketing campaign, which suggested that Xbox wasn’t a single console but rather a suite of Game Pass-capable devices, leading to even more confusion around the brand.

How it’s going

Just how bad are things? As Sharma and Xbox’s chief content officer Matt Booty wrote in the “reset” memo, “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.” The Activision deal, meanwhile, cost $68.7 billion. The company spent all of that money just to make it even less clear what an Xbox is.

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.

What happens next

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.

By the way