"It is neither possible nor desirable to own every great independent studio."
On July 6, at the dawn of a new fiscal year, Microsoft announced it was laying off 3,200 people in its Xbox division, plus an additional 3,200 employees across other departments. Of the Xbox layoffs, 1,600 jobs were cut immediately, while the remaining 1,600 will be lost over the coming year, the promise casting a morbid shadow over the immediate future of Microsoft's gaming business. Additionally, Xbox attempted to shutter five of its development teams — Arkane Studios, Compulsion Games, Double Fine, Ninja Theory and Undead Labs — and it ended up divesting four of them, while the future of Arkane remains uncertain.
The layoffs hit Xbox at all levels: Doom creator id Software lost a reported 50 percent of its staff, Double Fine had to drop a third of its employees as it bought itself back from Microsoft, the platform team was gutted, and it appears that multiple projects were canceled at Fallout: New Vegas studio Obsidian Entertainment, including a sequel to Avowed.
Knowing it was coming didn't ease the carnage.
Xbox CEO Asha Sharma and chief content officer Matt Booty, both of whom assumed their roles early this year in a surprise c-suite shakeup, outlined the brand's dire financial situation in a June public memo. They highlighted broad internal issues with Xbox games, consoles, infrastructure and marketing, and ominously promised a "reset" for the business. Rumors of incoming mass layoffs and reports of potential studio closures swiftly followed, with the culling scheduled to begin just after Microsoft's new financial year on July 1.
"We will end this fiscal year at about a 3 percent accountability margin, down year-over-year," Sharma and Booty wrote in their 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." (Including Activision Blizzard King, which Xbox acquired in 2023, adds $69 billion to the company's expenditures.)
Ahead of the layoffs, Xbox union members represented by CWA urged the company to consider the human and creative cost of repeated mass firings, and to negotiate in good faith over worker protections. Union members accused Microsoft of leaving proposals on the table for months at a time, paying little attention to meetings and unjustly allocating the company's vast financial resources. UVW-CWA treasurer Sherveen Uduwana noted that Microsoft CEO Satya Nadella personally made $96 million in 2025.
"There is no shortage of wealth in the games industry, especially if we're talking about Xbox, Sony, EA," Uduwana said.
After Xbox announced the layoffs on July 6, the CWA in the United States and Canada filed lawsuits against Microsoft over unfair labor practices, and employees held protests outside their offices calling for "people over profits."
Additionally in July, Xbox's network went down for nearly a day and exposed that even physical media isn't immune to DRM on the company's consoles, though the disc issue was apparently a bug that will be fixed. Days later, Microsoft's Q4 2026 financial results revealed a revenue decline of 10 percent for Xbox. Annually, Xbox's reported revenue fell by more than $2 billion year-to-year, landing behind its closest competitor, PlayStation, by multiple billions.
All of this followed two years of rolling layoffs at Xbox, eight years of increasingly reckless studio acquisitions, and a systemic pattern of valuing potential revenue over any sort of creative process. But we'll get to that at the end. First, an overview of Xbox's terrible, horrible, no good, very bad July.
On July 6, 2026, Microsoft announced that it was laying off 3,200 Xbox employees, half immediately and half over the coming fiscal year. In a blog post announcing the layoffs, Sharma wrote, "Our business today is not healthy," the full sentence hyperlinked to her June memo as if to say, per my last email.
"We are operating at margins that are 3-10x lower than comparable platform and publishing businesses," she continued. "We entered Gen 9 with a smaller install base and a higher cost structure. To grow, we bet on Game Pass, multi-platform, and a broader portfolio of content. While those businesses have created meaningful value, they did not grow at the pace we expected. As that happened, our core business weakened, and we added more teams, more investment, and more time, hoping for a better outcome. And now the industry is facing the most severe hardware crisis in its history. We must reset Xbox."
On top of studio shakeups and sales, the layoffs hit Xbox's platform division, which includes hardware, Game Pass and marketing teams. Xbox COO Dave McCarthy took the opportunity to retire after 17 years with the company, replaced by Xbox Live Arcade and Minecraft leader Helen Chiang, who will report directly to Sharma.
"Today, in some parts of the company, work passes through as many as 14 layers of management," Sharma wrote. "Our platform teams are 40 percent larger than they were at the start of this generation, even as our player base and playtime have declined. That complexity has slowed decisions, blurred accountability, and made it harder to deliver for players. As we reset XBOX, we will simplify. We will reduce management layers to no more than five, and where possible, three."
All told, Microsoft laid off 4,800 people across Xbox and other divisions on July 6, accounting for 2.1 percent of the company's global workforce, and the gaming team has a guillotine hanging over its head for the next year. Xbox also sold off four studios, all of which were purchased in the past eight years, while the fate of one remains unclear nearly a month later. Here's where each of these studios stands today:
Compulsion Games bought itself back from Microsoft and will revert to an independent studio, retaining the rights to all of its original titles — Contrast, We Happy Few and South of Midnight, the latter of which was developed at Xbox and picked up numerous awards just last year. The studio was founded in Montreal in 2009 by former Arkane developer Guillaume Provost.
In a statement shared on July 6, Compulsion said the following:
"Our immediate priority is to support our team throughout this transition period. We are confident in the future of Compulsion Games and look forward to this next chapter where one thing will remain constant: We will create unique games that tell important stories, all with the goal of touching the hearts and minds of our players."
There has been no word of a staff reduction at Compulsion as part of this process.
Like Compulsion, Double Fine purchased itself back from Xbox and will operate as an independent outfit once again, complete with the rights to its original IP, in-progress projects and extensive catalog. Double Fine is a long-standing and highly influential studio, especially in the indie space, where it co-created the non-profit organization Day of the Devs to highlight up-and-coming games. It was founded by ex-LucasArts developer Tim Schafer and friends in 2000, with the bonafide classic Psychonauts as its first release. Its 2025 game Keeper, conceived by Brütal Legend and Broken Age director Lee Petty, is a particularly beautiful experience.
As part of the buyout, Double Fine laid off 23 staff members, an estimated quarter of its team. Double Fine announced the reduction on July 28, three weeks after the Xbox reset, writing the following:
"As a small, tightly-knit team, these actions are not taken lightly. Only the survival of our studio would ever make us consider such a painful action. Our transition to becoming an independent company also means becoming a size that we can sustain. The people we are losing were all important. They all made an impact on our games and culture, and they will be missed. We are committed to supporting each affected person as best as we can, and we thank them for their hard work and commitment to the creative spirit we cherish here at Double Fine."
Games at Xbox: Bleeding Edge, Senua's Saga: Hellblade II, Senua (in progress)
Ninja Theory found a new owner that will fund its projects going forward, though it remains unclear who the buyer is. Born in 2000 as Just Add Monsters and renamed to Ninja Theory in 2004, the studio spent its early years stumbling from one publisher to the next with a suite of ambitious games, including Heavenly Sword, Enslaved: Odyssey to the West and DmC: Devil May Cry, until it found its niche with the technically impressive Hellblade series in 2017.
Senua, the third game in the Hellblade franchise, was revealed at Xbox's big summer showcase in June. Reports that Ninja Theory was being shuttered or sold off surfaced three weeks later. Ninja Theory has just over 100 developers on staff and will continue working on Senua at its new parent company.
Games at Xbox: State of Decay 2, State of Decay 3 (in progress)
Undead Labs, best known as the State of Decay studio, has also been acquired by a mysterious new owner and will continue working on its coming title, State of Decay 3, with their support and funding. Undead Labs was founded in 2009 by Guild Wars co-creator Jeff Strain, and the first State of Decay landed in 2013, published by Microsoft. Though Undead Labs started working on State of Decay 3 under the Xbox banner, it'll be the first game in the series to be published outside of Microsoft.
