After weeks of uncertainty, Microsoft have finally revealed what their big Xbox business “reset” involves. Spoilers: it’s not great! Gaming division CEO Asha Sharma has announced that they will lay off 3200 people over their next financial year, beginning today with around 1600 redundancies. In addition, Microsoft are parting ways with five of their best-known studios: Psychonauts developers Double Fine, State of Decay developers Undead Labs, Senua developers Ninja Theory, South of Midnight developers Compulsion, and Dishonored developers Arkane.

Further details are few, but here are the broad strokes: Compulsion and Double Fine are going indie again, while Ninja Theory and Undead Labs have found unnamed new owners. Arkane’s status is unclear: the studio’s bosses are currently haggling with a works council of employees over various “strategic options”.

“Compulsion Games and Double Fine Productions will return to management and transition to independent studios with their IP, catalog, and runway for their next games,” Sharma writes on Xitter. “Ninja Theory and Undead Labs have entered terms to join new ownership with funding to complete and grow Senua and State of Decay 3. In France, Arkane’s management is beginning required consultation with its Works Council to review potential strategic options.

“We are also making reductions across other units, and in some cases, shifting investment to focus on higher priority projects,” she continues. “These changes vary in size across Activision, Bethesda/ZeniMax, Blizzard, King, Mojang, and XBOX Game Studios. None of our first party publicly announced games or projects are being cancelled as part of these reductions.”

All told, the studio spin-outs will reportedly account for around 300 of today’s redundancies, according to Stephen Totilo’s Game File. Also according to Totilo, the unannounced deal for State of Decay maker Undead Labs means that State of Decay 3 doesn’t have to release on Game Pass.

Sharma’s justifications for all this carnage broadly echo her and fellow Xbox bigwig Matt Booty’s memo from a few weeks ago: costs have gone up, we’ve spent a crapload of money on acquisitions that haven’t paid off sufficiently, and the future of gaming hardware and Xbox specifically looks grim.

“Our business today is not healthy,” she writes in the Xitter post. “We are operating at margins that are 3–10x lower than comparable platform and publishing businesses. We entered [the most recent console generation] with a smaller install base and a higher cost structure. To grow, we bet on Game Pass, multi-platform, and a broader portfolio of content. While those businesses have created meaningful value, they did not grow at the pace we expected. As that happened, our core business weakened, and we added more teams, more investment, and more time, hoping for a better outcome. And now the industry is facing the most severe hardware crisis in its history.”

Sharma offers some further rebukes for the older Xbox strategy of securing market dominance by hoovering up every studio under the sun. “Since 2018, we have aggressively expanded our studio portfolio while the number of games created each month across the industry now outpaces the last ten years combined,” she comments. “We now find ourselves competing not only with the largest publishers, but also with smaller independent studios. It is neither possible nor desirable to own every great independent studio. We have also learned that we are not the best home for every type of studio; in a typical year, we lost 64 cents for every dollar we invested.”

As regards Xbox’s corporate structure in general, Sharma claims that “our platform teams are 40% larger than they were at the start of this generation, even as our player base and playtime have declined”, which has apparently made for slower decision-making. She’s going to fix that by reducing “management layers to no more than 5, and where possible, 3”, producing “a flatter organization” dedicated to “makers”, “player-coaches” who are “deeply involved in the work while developing their teams”, and “directly responsible individuals” who “own key decisions and outcomes”. Yes, the corpospeak is especially frightful in this one. Microsoft are also going to “streamline” their code base, says Sharma, and spend “50% less” on vendors – i.e. third-party services.

As part of all this, Microsoft have appointed a chief operating officer, former head of Mojang Helen Chiang, to work “across content, hardware, platform, and services”. This appointment reflects Sharma’s view that Xbox has become overly fragmented with expansion.

Long story short: what a mess. I’m glad to hear that the five studios above have managed to escape outright closure, but I’m concerned by the ambiguity around Arkane. Best of luck to everybody affected. We’ll almost certainly have more to share very soon.