The crisis wasn’t unexpected. New Xbox leadership, Asha Sharma as CEO and Matt Booty as chief content officer, had warned in a June memo about the division’s core problem: operating margins 3 to 10 times lower than competitors, a shrinking install base, and eight years of acquisition spending that produced diminishing returns. Over five years, Xbox spent $20 billion on content, platform, and hardware subsidies while revenue declined nearly half a billion dollars. Adding the $69 billion Activision Blizzard King acquisition, total spend became unsustainable.
Five Studios, Five Different Fates
The studio closures tell different stories. Four of the five targeted studios were divested back to independence:
- Double Fine bought itself back and immediately laid off roughly 23 employees (one-third of its staff)
- Compulsion Games regained full independence with all IP rights intact
- Ninja Theory and Undead Labs found new owners (unnamed publicly) and will continue development on Senua’s Saga and State of Decay 3 respectively
- Arkane Studios entered legal consultation as a French entity, exploring potential investors or closure. Its Marvel’s Blade project remains in development limbo
Arkane faced particular damage. Xbox had already shuttered its Austin branch in 2024 after the failed Redfall launch. The studio’s remaining workforce lost 50 to 70 staff members.
Structural Collapse Across the Platform Division
Xbox’s core platform business suffered the deepest cuts. Management layers compressed from as many as 14 down to five. Platform teams that had swollen to 40 percent larger than generation-start will now match the declining player base.
Dave McCarthy, Xbox COO for 17 years, retired. Helen Chiang, who previously led Xbox Live Arcade and Minecraft, replaced him and now reports directly to Sharma.
Bethesda’s Austin office lost 22 employees, but the publisher clarified its pipeline: The Elder Scrolls VI leads development, Fallout 5 enters preproduction, Fallout 3 and New Vegas remasters are coming, and a major Fallout 76 expansion arrives in 2027.
Obsidian Entertainment, home to the cancelled Avowed sequel, lost 60 to 70 staff and pivoted entirely to a new Fallout project. Microsoft owned 24 studios at its 2023 peak. Today it has 15.
Labor Fight and Contradictions
The Communications Workers of America, representing hundreds of unionized Xbox workers, filed lawsuits against Microsoft over unfair labor practices. Union representatives highlighted a stark contradiction: CEO Satya Nadella earned $96 million in 2025 while frontline workers faced termination. Microsoft allegedly stalled contract negotiations for months and dismissed worker protection proposals.
The only secured union contract at Xbox belongs to ZeniMax Online’s quality assurance workers, ratified in June 2025 with minimum salary guarantees, wage increase frameworks, and AI protections. Other organizing efforts remain stalled, with Microsoft accused of weaponizing delay. Employees held protests outside offices with signs reading “People Over Profits.”
What Xbox Faces Now
The division’s immediate future hinges on Game Pass sustainability and whether 15 remaining studios can deliver hits without the bloat that characterized the acquisition era. Sharma promised simplification and accountability, but the institutional knowledge lost through layoffs is irreversible.
The deeper question isn’t whether Xbox can recover from July’s purge. It’s whether Microsoft ever truly understood what it was buying. Eight years of acquisition spending with no clear strategy or exit plan created a studio portfolio that couldn’t deliver returns. The cuts represent an admission that spending like a venture fund with unlimited capital doesn’t work in creative industries where talent and culture matter most.
Follow Hashlytics on Bluesky, LinkedIn, Telegram and X to Get Instant Updates
