Xbox CEO Asha Sharma has outlined a stark assessment of Microsoft's gaming division, acknowledging that the business is not healthy and operated at significantly lower margins than comparable industry players. In a memo that has been described as remarkably candid, Sharma detailed the company's struggles, stating that Xbox entered the current console generation with a smaller install base and a higher cost structure.
Sharma indicated that strategic bets on Game Pass, multi-platform releases, and expanding its content portfolio, while creating value, did not achieve the expected growth. This led to the core business weakening, prompting additional investment and time spent in pursuit of a better outcome. The current industry hardware crisis has exacerbated these challenges, necessitating a significant reset for Xbox.
The fallout from this strategic re-evaluation has resulted in widespread layoffs, affecting approximately 3,200 employees over the next year. This includes significant reductions across Activision, Bethesda, Blizzard, King, Mojang, and remaining Xbox studios. Notably, five game studios—Compulsion Games, Double Fine, Undead Labs, and Ninja Theory—are being divested, though Arkane's future remains uncertain. Sharma stated that the company has learned it is not the ideal home for every type of studio.
This move marks a departure from the previous era's philosophy, which prioritized scale and expansion. Under Phil Spencer's leadership, the strategy involved expanding beyond consoles to multi-platform releases, acquiring major studios, and pushing Game Pass and mobile gaming. The goal was to achieve an "inevitable" market presence, a strategy Sharma now suggests was built on a weak foundation and executed too rapidly.
While King, developer of Candy Crush, and Mojang, creator of Minecraft, are expected to be less impacted due to their direct reporting lines to Sharma and their significant audiences, other studios face uncertainty. Reports suggest studios like id Software and ZeniMax Online Studios have already seen substantial layoffs, with Blizzard staff awaiting further developments. This period is described as torturous for employees across these development houses.
Sharma also pointed to operational inefficiencies, noting that Xbox's platform teams have grown by 40% since the start of the generation, despite declines in player base and playtime. This suggests further restructuring and potential reductions in management layers and platform teams to increase efficiency and speed up decision-making.
The implications for Game Pass are also significant. With reduced budgets and staff, Sharma faces the challenge of determining a sustainable price point for the service, potentially shifting from its current value proposition to a model more akin to PlayStation Plus.
The situation is framed as a cautionary tale of corporate hubris and the pursuit of growth above all else, with leadership making rash decisions with insufficient understanding. Sharma's direct communication aims to convey necessary but difficult truths about the business's state, though the article's analysis suggests that many of these drastic measures may not have been inevitable.