Microsoft shuts down several game studios under its umbrella, rumors of layoffs still ongoing

According to financial news sources, Microsoft (MSFT.US) has suddenly closed several video game studios under its Xbox division as part of an ongoing large-scale cost-cutting plan. This week, Xbox has started offering voluntary departure agreements to producers, quality assurance testers, and other employees at ZeniMax. Insiders familiar with the company's plans revealed that Microsoft acquired ZeniMax in 2020 for $7.5 billion. Other employees within the Xbox organization have been informed that more layoffs are underway.

On Tuesday, Microsoft unexpectedly shut down three Xbox subsidiaries and is set to close a fourth, leaving employees shocked. The closed companies include Tango Gameworks based in Tokyo, which released the well-received action game "Hi-Fi Rush" last year; insiders mentioned that Tango was preparing for a sequel.

Three individuals who attended a meeting on Wednesday morning with ZeniMax employees revealed that Xbox President Matt Booty praised "Hi-Fi Rush" but did not specify why the company decided to close the development studio responsible for the game. When discussing the broader closures, Booty mentioned that the company's studios were too spread out—like "peanut butter on bread"—and that the department as a whole was feeling understaffed. He stated that they decided to close these studios in order to reallocate resources elsewhere.

Booty added that the closure of the subsidiary Arkane Austin (long-time developer of games like "Prey") was not related to the performance of their new multiplayer game "Redfall," which was considered a failure both critically and commercially. Insiders revealed that prior to the closure, Arkane had been hoping to return to its roots by launching a new single-player "immersive sim" game, similar to the "Dishonored" series.

Jill Braff, head of ZeniMax studios responsible for titles like "Fallout" and "Doom," expressed her hope that the restructuring would allow the department to focus more energy on fewer projects. According to a recording of the meeting, she said, "A leaner central team is being asked to do more and more, and it's hard to support nine studios globally. I think we're all about to fall over."

Both Tango and Arkane released games last year and were looking to hire more staff for their upcoming projects, which Booty and Braff identified as a key reason for the closures. Tango's founder and studio head Shinji Mikami departed last year.

Amidst the Xbox layoffs, the video game industry is experiencing a broader contraction following a period of rapid growth during the pandemic. Recently, Microsoft's gaming division has expanded more than any competitor through acquisitions of ZeniMax and Activision Blizzard (ATVI.US), totaling over $76 billion. In February of this year, Microsoft laid off 1,900 employees, primarily at Activision Blizzard Insiders say that Microsoft's large-scale acquisition of Activision Blizzard has increased Microsoft's leadership scrutiny of the Xbox division.

In recent years, Xbox has invested heavily in Xbox Game Pass, a subscription service where users pay a monthly fee to download hundreds of games unlimitedly. To enhance the attractiveness of this service, Xbox has acquired dozens of studios, including companies known for producing indie games, such as Double Fine based in San Francisco.

While most game publishers aim to make a fortune on games that cost hundreds of millions of dollars, Xbox has committed to supporting creative games with smaller budgets and lower sales expectations like "Hi-Fi Rush". As long as a game can support the Game Pass library, selling tens of millions of copies is not crucial. However, Game Pass has not achieved significant growth as Xbox boss Phil Spencer had hoped.

Mat Piscatella, Executive Director at Circana, stated that since mid-2021, monthly subscription spending on non-mobile video games in the United States has "remained flat to low single-digit growth". Piscatella said, "In our data, Game Pass spending experienced a huge growth period from the end of 2019 to early 2021, and has since stabilized. Purchasing games and add-ons, as well as free-to-play models, remain the preferred ways for American consumers to access electronic games, at least for now."

While there are no signs that Xbox intends to abandon the Game Pass model, there are indications that its big bet has not paid off. In the most recent quarter, Xbox content and services sales grew by 62%, but as noted by Niko Partners analyst Daniel Ahmad last month, this growth is entirely attributed to the acquisition of Activision Blizzard. He pointed out on social media that without the sales from this deal, Xbox game revenue would have declined by about 5% year-on-year, "software and services did not grow, hardware revenue would have dropped significantly."

Due to declining console game revenue, the company has recently started releasing some games on competing platforms. In an interview with gaming website Polygon in March this year, Spencer said, "My biggest concern is the lack of growth in this industry."