Xbox has admitted its studios strategy failed: $20 billion in acquisitions over five years coincided with a revenue drop of nearly $500 million, according to a statement from Xbox CEO Asha Sharma and head of Xbox Game Studios Matt Booty. The company is now reportedly preparing to close several studios and make deep cuts to its business.

Bloomberg reported that Compulsion Games (South of Midnight), Double Fine (Psychonauts) and Ninja Theory are all facing closure. All three are negotiating to go independent — a path that may still involve major layoffs. Ninja Theory had announced Senua, a new entry in its psychological action franchise, at the Xbox Games Showcase just weeks earlier.

Why is Xbox cutting now?

Sharma and Booty framed the closures as a broader "reset" amid plummeting hardware revenues and a pivot to the struggling Game Pass subscription model, referencing investments that have not paid off for Xbox's long-term strategy or financial bottom line.

"For some of you, these realities will be surprising and even frustrating to discover," they wrote. "We won't succeed by hiding hard truths, nor will we succeed by doing the same thing and expecting different results."

Excluding the Activision Blizzard mega-purchase in 2023, the executives conceded the studio investments have not netted out. "Going forward, this cannot continue," the statement said, noting Xbox had become "over extended" across a studio collection that grew to 30 teams during a late-2010s spending spree.

"We have made mistakes, and will continue to make them, but what matters is that we listen, learn and adjust the course where needed," they added. Microsoft did not immediately respond to a request for comment.

What does this mean for the wider industry?

Celia Pearce, an award-winning game developer and game design professor at Northeastern University, called the decision less a "reset" than more of the same for an industry rocked by years of layoffs. "I'm not surprised," she said. "The mainstream video game industry has been in a decline the last few years."

Pearce pointed to an unsustainable economic model: two decades of pursuing better graphics and tech made games ever more expensive and labor intensive, while big-budget game prices only recently rose from $60 to $70. "You can't keep increasing your cost of doing business but keeping the product at the same price point," she said.

She also connected Xbox's trajectory to broader corporate consolidation — from the Paramount-Warner Bros. merger to Disney's 2019 acquisition of 21st Century Fox — which gives consumers fewer choices while forcing companies to deliver profits that justify billions in spending or risk going under.

Is there an upside for developers?

Pearce sees one. Studio closures could push highly talented developers into independent development at a moment when self-publishing is easier than ever, no longer tied to big-box retail distribution.

"Even though it's going to be painful, I think we're going to get some really talented people once again striking out on their own and in an economic environment where it's increasingly easier to self-publish and be successful," she said.

There is precedent: Double Fine itself was founded by creatives who left LucasArts in the late 1990s. Previous reports that Microsoft has considered spinning out Xbox as its own wholly-owned subsidiary suggest further structural decisions may still be ahead.