Inside Microsoft’s Xbox turmoil

Microsoft launched a fiery Xbox controller on the same day it announced gaming layoffs.

Just hours after learning that Microsoft was shutting down a number of game studios this week, Dinga Bakaba, head of Microsoft-owned Arkane Lyon, decided to let the company know how he felt about the decision — right in public. “Don’t throw us into gold fever gambits, don’t use us as strawmen for miscalculations / blind spots, don’t make our work environments Darwinist jungles,” Bakaba wrote on X.

Bakaba, whose studio wasn’t impacted by the layoffs this week, said his message was aimed at “any executive reading this,” including the Xbox leaders behind the latest wave of layoffs. It was a rare public display of criticism, but sources at Microsoft tell me it reflects a growing discontent and fear among Xbox employees about what comes next.

Microsoft’s latest round of layoffs shocked both employees and fans. Arkane Austin’s big Redfall update was on the way with a new offline mode, and the DLC was being worked on just hours before the studio was closed.

Xbox employees were surprised at the Tango Gameworks closure

The shutdown of Tango Gameworks, the studio behind Hi-Fi Rush, has surprised people the most. The game was considered an Xbox hit, winning praise among critics and making its way to PS5 earlier this year. Even Microsoft was happy with Hi-Fi Rush.

“Hi-Fi Rush was a break out hit for us and our players in all key measurements and expectations,” said Aaron Greenberg, head of Xbox games marketing, just a year ago. “We couldn’t be happier with what the team at Tango Gameworks delivered with this surprise release.”

Greenberg and Xbox chief Phil Spencer both visited Tango Gameworks in September, playing games with the team and posing for group photos. Now, the studio is the latest victim of layoffs that have rocked the game industry over the past 18 months.

Three Bethesda studios — Arkane Austin, Tango Gameworks, and Alpha Dog Games — are being shuttered, and the team at Roundhouse Studios is moving into ZeniMax Online Studios. The studio closures come less than six months after Microsoft laid off 1,900 Activision Blizzard and Xbox employees and just months after Sony closed some of its own game studios and laid off around 900 employees. The depressing list of layoffs at game studios continues to grow on a weekly basis, with GTA 6 and BioShock publisher Take-Two laying off hundreds of employees last month and cutting projects.

Inside Xbox, there’s now uncertainty about what the future holds and questions over Microsoft’s gaming strategy. While Microsoft is looking toward a more PC-like future for its Xbox console, the company continues to battle a slowdown in Game Pass subscribers, lackluster Xbox sales, and game launch delays.

A combination of these events led to four previously Xbox-exclusive games launching on the PS5 recently and some landing on the Nintendo Switch. I reported earlier this year that Microsoft had been considering bringing Gears of War to rival consoles, and we’re still waiting to see if a long-rumored Gears of War collection is ever confirmed. Either way, I’m still expecting to see more Xbox games arrive on PS5 and Switch, and it will be interesting to see if the Xbox game showcase in June includes any new announcements for rival hardware.

Microsoft has been debating putting Call of Duty on Game Pass

Microsoft has also had internal debates about whether to put new releases of Call of Duty into Game Pass. I understand this is a debate that has been ongoing internally for quite some time, with concerns from some that the revenue that Call of Duty typically generates for Activision Blizzard will be undermined by Game Pass.

I’m told that Microsoft has also considered increasing the price of Game Pass Ultimate again. These are only considerations, so a final decision could mean we still see a future Call of Duty release appear in most versions of Game Pass. The debate internally reflects the fact Microsoft’s Xbox strategy has shifted from just delivering its games exclusively into Game Pass to considering bringing more Xbox games to multiple platforms.

In yesterday’s memo from Matt Booty, head of Xbox Game Studios, there was a hint of a reprioritization for Bethesda teams that we may well see elsewhere with Xbox. “These changes are grounded in prioritizing high-impact titles and further investing in Bethesda’s portfolio of blockbuster games,” said Booty, before noting that Xbox is doubling down on Bethesda franchises that are “best positioned for success.”

Did Hi-Fi Rush really not meet that bar? Now, there will be inevitable questions about what other Xbox games aren’t “best positioned for success.”

Xbox now has a strong lineup of games planned for 2024, with Senua’s Saga: Hellblade II set to debut in a matter of weeks on May 21st. I understand Hellblade II is another game that Microsoft has been considering for the PS5. If that ever happens, at this point, it’s not clear if even that would be considered a success.

Xbox employees are now bracing for what’s next, as it seems unlikely that we’ve seen the last of Microsoft’s gaming layoffs and cutbacks. There are whispers among employees that core Xbox Game Studios are set for cutbacks next. Last month, Microsoft reported that Xbox hardware revenue was down by 31 percent year over year and an obvious admission that this was “driven by lower volume of consoles sold.” Last year, Microsoft reported a 30 percent drop in Xbox hardware revenue, blaming “increased console supply” from the prior year in 2022. Sony PS5 sales have also slowed, but not like Microsoft’s.

Microsoft’s Xbox business isn’t growing without Activision Blizzard

While Xbox hardware sales are a cause for concern, Microsoft has been beating the Xbox Game Pass drum in recent years, telling us, “The [Xbox] business isn’t how many consoles you sell.” But Microsoft’s latest earnings showed that Xbox content and services, which includes Game Pass, would have only been up a single percent without Activision Blizzard, and overall gaming revenue would have declined without this giant acquisition. Microsoft CFO Amy Hood is now expecting Xbox hardware revenues to decline again next quarter.

Microsoft’s gaming business isn’t growing without Activision Blizzard right now, and how that plays out throughout 2024 will be key for all Xbox studios. Microsoft has a busy fall ahead for Xbox, with Bethesda currently targeting September for its Starfield expansion Shattered Space, Activision planning the next Call of Duty for late October, and Avowed and Microsoft Flight Simulator 2024 likely to follow in November. To top that all off, Indiana Jones is currently planned for December.

If Microsoft’s game studios can deliver all of these games on time, then there will be plenty to play on Xbox this holiday, with a new Gears of War title expected to be announced during the Xbox summer showcase alongside some release dates for other anticipated Xbox games.

Microsoft will be banking on some new game announcements lifting the Doom around Xbox. But the company’s gaming strategy still looks unclear — and the challenges run deeper than a handful of holiday launches.