Microsoft plans more cuts after Xbox Studios closure

The sudden closure of several video-game studios in Microsoft Corp.’s Xbox division was the result of a broader cost-cutting initiative that still hasn’t ended.

This week, Xbox began offering voluntary severance agreements to producers, quality assurance testers and other employees of ZeniMax, which it bought for $7.5 billion in 2020, according to people familiar with the company’s plans. Others in the Xbox organization have been told that more cuts are on the way.

An Xbox spokesperson declined to comment.

Employees were stunned Tuesday by the unexpected shuttering of three Xbox subsidiaries and the absorption of a fourth. Among those shuttered is Tokyo-based Tango Gameworks, which released the critically acclaimed action game Hi-Fi Rush last year. Tango was in the process of making a sequel, said the people, who asked not to be identified discussing non-public information.

During a town hall with ZeniMax staff on Wednesday morning, Xbox president Matt Booty praised Hi-Fi Rush, but did not explain why the company had closed the development studio behind it, according to three people in attendance. According.

Speaking more broadly about the closures, Booty said the company’s studios were spread thin — like “peanut butter on bread” — and leaders across the division were feeling understaffed. They decided to close these studios to free up resources elsewhere, he said.

Booty said that the closure of Arkane Austin, a longtime developer assistant on games like Prey, was not connected to the performance of its new multiplayer game, Raidfall, which was a critical and commercial flop.

According to people familiar, before its closure, Arkane was looking to return to its roots by introducing a new single-player “immersive sim” game, such as a new entry in the Dishonored series.

ZeniMax Studios head Jill Braff said at the town hall that she hopes the restructuring will allow the division, which also develops Fallout and Doom, to focus more on smaller projects. “It’s difficult to support nine studios around the world with a weak central team,” he said, according to audio of the meeting reviewed by Bloomberg.

“I thought we were going to fall,” he said.

Both Tango and Arkane had released games the previous year and were looking to hire additional staff to introduce new projects, which Booty and Braff cited as the main factor behind their closure. Tango founder and studio head Shinji Mikami left last year.

These cuts at Xbox come amid a broader contraction in the video game industry due to an economic turnaround after a period of rapid growth during the pandemic. Recently, Microsoft’s gaming division has expanded more than any of its competitors through the acquisition of ZeniMax and Activision Blizzard for a combined $76 billion. In February, Microsoft cut 1,900 jobs, mostly at Activision Blizzard.

The massive Activision Blizzard acquisition has increased scrutiny of the Xbox division from Microsoft leaders, according to people familiar.

In recent years, Xbox has invested deeply in Xbox Game Pass, a subscription service that provides unlimited access to hundreds of downloadable games for a monthly fee. To fill the service with new temptations, Xbox acquired dozens of studios, including outfits known for making small games like San Francisco-based Double Fine.

While most game publishers are looking to make big changes with games costing millions of dollars, Xbox has promised to support less massively creative titles like Hi-Fi Rush with smaller budgets and lower sales expectations. It doesn’t matter if a game sells millions of copies, as long as it helps strengthen the Game Pass library.

But Game Pass hasn’t seen the massive growth Xbox boss Phil Spencer was hoping for.

Matt Piscatella, executive director of analytics firm Circana, said monthly, non-mobile, video-game subscription spending in the US has been “flat to low single-digit growth” since mid-2021.

“In our data, Game Pass spending actually had a big growth period from late 2019 to early 2021 and has plateaued since then,” Piscatella said. “Purchasing games and add-on content as well as the free-to-play model is still the most preferred way to obtain video games by American consumers, at least for now.”

Although there’s no sign that Xbox plans to abandon the Game Pass model, there are signs that its big bets haven’t paid off. During the most recent quarter, sales of Xbox content and services increased by 62%, but as Niko Partners analyst Daniel Ahmed pointed out last month, that increase was entirely due to the Activision Blizzard acquisition. On social media, he noted that without sales from that deal, Xbox gaming revenues would have declined by about 5% year over year, with “no software and services growth and a sharp decline in hardware revenues.”

With console revenues declining, the company has recently begun releasing some of its games on competing platforms. In a March interview with gaming site Polygon, Spencer said that “the thing that worries me most about the industry is the lack of growth.”

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