“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 reEO 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.
Layoffs and studio sales
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
Games at Xbox:South of Midnight
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.
Double Fine
Games at Xbox:Psychonauts 2, Keeper, Kiln
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.”
Ninja Theory
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.
Undead Labs
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 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
“Ninja Theory and Undead Labs have entered terms to join new ownership with funding to complete and grow Senua and State of Decay 3,” Sharma wrote in her memo.
Arkane Studios
Games at Xbox:Deathloop, Redfall, Marvel’s Blade (in progress)
The fate of Arkane Studios remains murky one month after the Xbox reset. Ahead of the official layoffs memo, reports were swirling that Xbox would shut down Arkane and cancel its Blade game that’s been stuck in development hell for a few years. After the memo, that’s still a possibility: As a French studio, Arkane has entered a legally mandated consultation period where it’s considering potential investors, a buyout or closure. This process could take months.
Xbox has already gutted Arkane once before. Xbox shut down Arkane Austin in 2024 following the incredibly rough launch of multiplayer vampire game Redfall, leaving Arkane Lyon on its own for the first time since 2006. Prior to Xbox ownership and Redfall, Arkane Austin developed the critically acclaimed immersive sim Prey. Arkane was a subsidiary of ZeniMax Media when Xbox swept up that entire group in 2021, though the studio was founded in 1999 by former EA developer Raphaël Colantonio (who now runs WolfEye Studios). Arkane games include the Dishonored franchise, several Wolfenstein spin-offs and Deathloop, and the team is known for building satisfying first-person stealth experiences. They could’ve made a killer Blade game, and maybe (maybe?) they still will.
From Bethesda to ZeniMax
Studio divestitures aside, multiple other Xbox teams were affected by the July layoffs. Doom studio id Software laid off 136 people, or roughly half of its team, as spotted by Game Developer. On July 10, id Software shared the following message on social media:
“Thank you all for the support this week. While our studio was impacted, those changes were spread across teams. We still have the crew we need to build the games and tech we’re known for. The team today is about the same size we were when making Doom (2016). We have always had a flat studio where everyone is a maker, and we will remain true to that philosophy going forward. We are focused on supporting each other and the team members impacted. We’re going to keep building the great games and tech that have defined us for the past 35 years, and we’re looking forward to seeing you at QuakeCon this August.”
Bethesda lost 22 employees at its Austin studio, according to filings found by Game Developer. Bethesda shared a roadmap on July 17 clarifying its current pipeline: The Elder Scrolls VI is its main focus, Fallout 5 is in preproduction, remasters of Fallout 3 and Fallout: New Vegas are coming, Fallout 76 is still getting updates, and Starfield is also still there. A big Fallout 76 expansion is coming in 2027, designed to tee up the Fallout 3 remaster, and the Fallout Shelter TV series shows no signs of stopping. An unscripted show based on the Fallout Shelter mobile game is also in the works.
Fallout: New Vegas, Pentiment and Avowed developer Obsidian Entertainment lost 60 to 70 employees, or roughly one quarter of its staff It appears that multiple in-development projects were canceled at Obsidian, including a sequel to Avowed that I really would’ve loved to play, and the studio is instead focusing on a new Fallout game
Obsidian is obligated under the WARN Act to notify California employees of coming layoffs if they exceed 50 people. The California WARN Act tracker shows 52 people were permanently laid off at Obsidian’s Orange County office, with notice provided on July 6 and the layoffs effective on September 4, 2026.
At its height in 2023, Microsoft owned 24 studios across Xbox and ZeniMax. Today, it has 15. Activision Blizzard King formally joined Microsoft in October 2023 and while its studios have been hit by thousands of layoffs since then, the number of teams under its umbrella hasn’t changed significantly. Microsoft’s remaining studios include The Coalition, Halo Studios, inXile Entertainment, Mojang Studios, Obsidian Entertainment, Playground Games, Rare, Turn 10 Studios, Bethesda, id Software, MachineGames and ZeniMax Online Studios.
Unions sue Microsoft over unfair labor practices
The Communications Workers of America labor union represents hundreds of Xbox employees at Microsoft in the US and Canada, and more than 3,500 people across the video game industry.
In 2023, roughly 300 QA workers at Microsoft subsidiary ZeniMax Online voted to unionize, forming the largest video game union at the time. Their contract with Microsoft was ratified in June 2025, including minimum salary requirements, a framework for wage increases and protections regarding the use of AI. Multiple studios across Xbox have since voted to unionize, including Raven Software and several teams under the Blizzard umbrella, covering Overwatch and Diablo workers. While organization efforts are ongoing, ZeniMax’s QA union is the only group with a secured contract, and Xbox union members have accused the company of stalling tactics and negotiating in bad faith.
“The Montreal workers, who work on highly successful game franchises like Fallout and The Elder Scrolls, among others, were shocked,” CWA Canada, which represents Bethesda workers in Montreal, wrote on July 6. “They had no advance notice, no idea why or how they were targeted, and they worry about the negative impact on the games they work on.”
According to Game Developer, 146 of the 158 ZeniMax Media employees laid off in Texas were represented by the union. The Bethesda Game Studios Union shared the following message on social media on July 6:
“In what is becoming a stressful annual routine, Microsoft has decided to lay off thousands, including MANY of us at Bethesda Games Studios. With over 10K developers already cut from previous rounds, those at the top have deemed that insufficient in fixing their mistakes. Today we say goodbye to many of our friends and colleagues and to hundreds more across Xbox, including folks that have worked at Bethesda Games Studios for decades. When will this cycle of cuts in pursuit of ever-greater profits end? Because of our One BGS union, we have the right to negotiate over the impacts of these layoffs, helping secure stronger severance packages and better support for those leaving the company. We will do everything we can to make sure our friends are properly taken care of.”
On July 15, Xbox employees at six studio locations in the US and Canada protested the layoffs outside of their offices in a Save Our Devs rally. Ten days after the Xbox reset memo, CWA in the US and Canada filed lawsuits accusing Microsoft of bad faith bargaining, coercive actions, contract repudiation and failing to provide notice to employees.
Former Bethesda employee Simon Préfontaine reportedly told Game Developer, “Our lawyers in the USA and Canada find these layoffs to be illegal and are therefore filing unfair labor practice actions against Microsoft on both sides of the border. We’re ready to do everything we can to get our members back to work on the games we love.”
An Xbox spokesperson provided a statement to Game Developer on July 16 that reads, “We respect our employees’ right to make their voices heard, and we recognize that this is a difficult time for many. We reached out to the union to begin effects bargaining and are committed to that process. We remain focused on supporting impacted employees through this transition while positioning the organization for long-term strength.”
The outage
The Xbox network went down the evening of Sunday, July 27 and it didn’t come back online until Monday afternoon, preventing users not only from playing games online, but from loading any digital game during that time. Some users were even unable to play their game discs. Xbox blamed the outage on issues with a licensing service outside of Xbox, and CTO Scott Van Vliet, who took over the role in May, called it an “unacceptable situation.”
Van Vliet later told The Verge that the issue shouldn’t have affected the ability to play disc games on Xbox consoles, explaining an issue prevented some consoles “from correctly using saved entitlements during the outage.” Entitlements are what tell your console that you’re allowed to play the game you “own,” and are meant to be saved locally so you can play games offline. Van Vliet promised a fix for this issue will arrive in an upcoming update.
Xbox revenue dropped over the past year
Microsoft’s fiscal year ends on June 30, so in July it released both quarterly results and an annual accounting of its various divisions. Although the broader company is making money hand over fist, Xbox came out of both earnings reports looking mighty rough. Annual revenue across the entirety of Xbox fell by $1.7 billion, or 7 percent, largely due to a 29 percent drop in hardware revenue. Content and services revenue (i.e., money from game sales and subscriptions) dropped 5 percent. Xbox’s content and services line actually ended Q1 2025 1 percent up year-over-year, but its most recent three quarters have been down, with a 5 percent dip in Q2 and Q3, and a huge 10 percent decline in Q4.
Annual drops in console sales are to be expected at the tail end of a console generation — last year Xbox hardware revenue dropped 25 percent, so in dollar terms the 29 percent decline this year was marginally lower. However, the tail end of a console generation is usually when companies leverage a huge install base to sell a lot of games. Unfortunately, this generation has been a disaster for Microsoft, with console sales sitting at a reported 35 million and evidently slowing to a trickle. For context, Microsoft ended up selling around 58 million Xbox One consoles, and the 360 before it reached around 86 million sales. Multi-platform publishing definitely helps somewhat, but without a captive audience to buy its games, it’s no surprise that Microsoft is struggling with “content and services” as the ninth generation comes to a close.
The cherry on top
An Xbox player in Brazil won a lawsuit against Microsoft on July 12, forcing Xbox to restore his digital game library and account after he was hacked and suspended. Xbox also had to pay the player $400 for his troubles.
Inevitable, obvious, only
Microsoft has proved to be a terrible steward of video game studios. Over the past eight years, Xbox devoured a stream of productive, talented teams and then barely gave them a chance to thrive before discarding or disbanding them. Since Microsoft’s $69 billion acquisition of Activision Blizzard King in 2024 — still the largest studio purchase in video game history — the Xbox division has experiencedfiveseismic shakeups resulting in thousands of people laid off, and numerous games and studios shut down. The latest round was at least partially driven by Microsoft’s huge investment in AI and an increasing reliance on AI to get things done.
No matter who’s in charge, Xbox has a habit of creating a problem and then using that strife as an excuse to behave badly. The July 2026 layoffs and studio sales represent the inevitable, obvious and only conclusion to Microsoft’s exorbitant six-year spending spree, and plenty of people saw it coming.
“Since 2018, we have aggressively expanded our studio portfolio while the number of games created each month across the industry now outpaces the last ten years combined,” Sharma wrote in the Xbox reset memo. She continued, “It is neither possible nor desirable to own every great independent studio. We have also learned that we are not the best home for every type of studio.”
Agreed.
