The news that Microsoft's Xbox division shuttered three studios and folded a fourth into ZeniMax Online is still ringing throughout the entire games industry at a time when layoffs and studio closures are almost a weekly certainty.
To try and make sense of the shocking announcement, we reached out to our good friends at MIDiA Research. Games Industry Analyst Rhys Elliott kindly answered a few questions, pointing out that the new Xbox vision centered on big IPs required 'breaking a few eggs to make an omelet'. He also reckons an impressive Xbox Games Showcase in June could mostly eclipse fans' anger.
Despite the overall Xbox business going up, Microsoft is still axing even respected developers who have made award-winning games. Why do you think that is the case? Should Xbox fans be worried about reduced investment in gaming?
While it’s true that gaming revenue was up +51% and Xbox content/services revenue was up +62% in calendar Q1, these gains mostly came from Microsoft’s Activision Blizzard acquisition. The inorganic acquisition growth actually offset a -5 % drop in gaming revenue, as well as flat Xbox content/services growth for Xbox.
As for the layoff news, there are a few angles to look at it. Xbox was acquiring a bunch of studios during the growth phase of Xbox Game Pass on console and when money was cheap. The days of cheap money are over. Profitability, stability, and efficiency are now in vogue, and interest rates have skyrocketed. Consolidation and cost-savings are the name of the game for big-tech companies now – from Meta and Amazon to Google and Microsoft. This is part of the reason Xbox chose to shutter respected studios that made award-winning games.
What’s more, Game Pass has clearly left its growth phase on console. Content from other studios and the recent Activision Blizzard acquisition – chiefly Call of Duty and Blizzard games – gives Xbox enough content to retain current subscribers while chasing other segments, like mobile.
Xbox is also rather siloed in terms of its studios, and likely looks at their profitability on a case-by-case basis, choosing to let go of studios it sees as a cost—in terms of opportunity and spending.
With the latest news, Xbox's reputation among hardcore gamers (and possibly even among developers) has taken a major hit. The perception is that Microsoft appears to be focusing entirely on short-term ROI (return on investment) for investors instead of building a long-term vision. Do you think the damaged reputation will hurt Xbox in the long run?
Xbox wants to reach 3 billion gamers, so it is refocusing towards bigger, sure-bet franchises that will help them reach this goal. That is the long-term goal here. Xbox likely did not lay off those studios just for short-term ROI – as the operational costs of those studios are a drop in the bucket for the wider organisation. Rather, the layoffs are to refocus and avoid letting the studio creep get too high. The company is shifting towards a new vision, one powered by huge IP and expansion into mobile.
Xbox, despite its smart PR over the past years, likely sees these studio closures as a ‘’you need to break a few eggs to make an omelet’’ kind of situation. It is a massive shame that those eggs are some of the most talented developers in the industry, and now their lives have been uprooted. Some of the other smaller studios under the Xbox umbrella are undoubtedly feeling less secure right now. From a fandom angle, Xbox has completely enraged the enthusiast gaming community and press, and a lot of trust is broken. However, the gaming news cycles move quickly, and another controversy will be front of mind soon. The speed at which the market moves has led portions of some communities to be fickle. For example, if Xbox flaunts an impressive release slate in its event next month, parts of the Xbox community will likely again be excited about Xbox content, and that will mostly eclipse the feelings of anger. It has happened time and time before, and it will happen again. However, not everybody will be convinced.
Gamers are beginning to see through PR. The truth right now is that game companies are struggling and are deciding to make harsh decisions that are riling gamers/press and uprooting the lives of talented developers. It is the job of PR to soften the blow of these often brutal decisions, but that job is becoming more difficult as gamers are becoming more in tune with the business side of games. For some communities, the business of games has even become more important than playing – just look at the Xbox and PlayStation fans on X. Xbox has indeed lost the trust of some of its most dedicated fans right now, and for some of those players, the trust is lost. It can be regained, but it will take time.
Do you believe the situation when it comes to industry-wide layoffs and studio closures will improve once banks like the Federal Reserve and the European Central Bank start lowering the cost of money?
When interest rates are lower, publishers tend to take more risks. This makes them less inclined to lay off staff and shutter underperforming subsidiaries (to save costs). Leaner times, like right now, push publishers to prioritise efficiency, with more of an eye on profitability than growth.
Thank you for your time.
Indeed, a lot will ride on the next Xbox Games Showcase, scheduled to air on June 9 starting at 10 AM PT / 1 PM ET / 6 PM BST. While it is definitely true that the gaming news cycle is fast and fickle, it will take a lot to start to regain some of the trust lost with the last few announcements.
It's now abundantly clear that Microsoft seeks to monetize on the biggest franchises it now owns across the largest possible market (including mobile, as soon as possible). To do that, though, it first needs to ship games that are unquestionably successful from both a critical and commercial standpoint, which has been historically challenging for Xbox.
Following the imminent launch of Senua's Saga: Hellblade II, the schedule puts the timed console exclusive STALKER 2 in early September, Starfield: Shattered Space likely in late September, the next Call of Duty in late October, Avowed and Microsoft Flight Simulator 2024 in November, and Indiana Jones and the Great Circle in December. That's not counting expansions like The Elder Scrolls Online: Gold Road, World of Warcraft: The War Within, and Diablo IV: Vessel of Hatred.
If Microsoft could show promising footage of all these games plus a few big announcements, such as the new Gears of War and DOOM, it would go a long way toward calming the Xbox fan base. One thing is clear, though: first-party developers are unlikely to feel as safe after Tuesday's news.
