MONTREAL — At 10:30 a.m. last Monday, about a dozen employees at Bethesda Game Studios in Montreal learned they would be laid off.

The group, part of a larger team of 120 at the Xbox-owned company, had been riding high with the ongoing success of action role-playing video game “Fallout 76” and another one called “The Elder Scrolls VI” in the works.

Instead, roughly 10 per cent of them were told via video conference by a director in Maryland they would be laid off in two months and locked out of company systems until then, said one worker who was present.

The Canadian Press is not naming the source because they were not authorized to speak publicly and feared it would harm their future job prospects. Xbox and Bethesda did not respond to questions on the layoffs.

The dozen employees were part of a much larger cull by Microsoft-owned Xbox, which announced on Monday that about 3,200 employees would be laid off in the coming year amid a “reset” at the video game business as it faces heightened competition.

The move marks the latest hit to an industry that has struggled to adapt to tougher market conditions after a surge in demand and investment during the COVID-19 pandemic. The subsequent retrenchment means that, in Quebec, the video game industry finds itself in a state of limbo as studios let go of workers, tax credits recede and consumers turn their attention elsewhere — even while some outfits find ways to thrive.

“We’re still in a bit of a restructuring period,” said Jean-Jacques Hermans, who heads Quebec’s video game industry association.

“We see game projects being abandoned or put on pause … We’re seeing employees being laid off in between projects, which wasn’t the case earlier.”

The stakes in the province are high. Quebec is home to more than 300 studios and 45 per cent of the country’s roughly 34,000 game developers, according to the association and consulting firm Nordicity. The sector generates more than $1.4 billion in economic output in Quebec each year. And Montreal plays host to big offices for major foreign companies like Epic Games — behind the massively popular “Fortnite” — and Ubisoft, whose nearly 4,000 employees in Montreal work on the “Assassin’s Creed” franchise and comprise the biggest studio in the world.

But both companies have taken hits. Epic cut more than 1,000 workers or 20 per cent of its staff earlier this year, some of them in Montreal. Ubisoft laid off nearly 140 employees after shuttering studios in Halifax and Winnipeg.

Eidos, Electronic Arts, Behaviour Interactive and other developers have all announced layoffs in Montreal over the last four months.

The cuts hint at a broader industry crisis that continues to unfold amid restructuring by major companies and the spread of rival forms of interactive entertainment as well as artificial intelligence.

“It feels like it’s a perfect storm,” said Philippe Morin, co-founder of indie studio Red Barrels in Montreal. “It’s definitely not a fun time in the industry.”

One problem is that overspending by big companies during the pandemic is now coming home to roost.

“Everybody was at home looking for stuff to do. That created a big peak of activity and salary increases and investments,” said Morin.

“If the revenues don’t follow, then the only solution is to decrease the expenses.”

Meanwhile, the proportion of people who play video games worldwide has been shrinking since 2021.

That decline coincides with the rise of new forms of digital entertainment. TikTok exploded across the world over the past half-decade, notching user numbers in the billions. Sports betting, prediction markets, cryptocurrency investing and consumer AI apps have all gobbled up a greater chunk of the attention economy.

“Competition isn’t just coming from other games,” said Paul Fogolin, CEO of the Entertainment Software Association of Canada. “People only have so much time in their days.”

And only so much money. Higher living costs have weighed on consumers’ willingness to spend, he said. The AI data centre boom has sharply raised the cost of random access memory and other components used in game consoles.

“Typically in a console release cycle, the console comes out and then, a couple years after, the prices decrease. We’re seeing the opposite,” Fogolin said.

Falling financial support from some governments makes things tougher still. For decades, Quebec paid companies up to 37.5 per cent of employees’ salaries through a tax credit. But two years ago, then-premier François Legault’s government revised the formula, reducing the credit by a third and omitting a slice of each worker’s wages from the calculation in a bid to cut costs.

“The impact was radical,” said Hermans. First to go were lower-level jobs such as quality assurance testers, who look for bugs in a game, or localizers, who adapt it for a specific region.

“They can move those positions from Quebec to Ontario quickly, or to Asia or to Mexico,” he said.

Generative AI throws more uncertainty into the mix, though how many job losses it accounts for remains unclear.

Fogolin described it as a tool for designers rather than a replacement, saving them time on more routine illustration tasks.

“Think about something like ‘EA Sports FC,’ where you have these massive stadiums. AI can help render realistic backgrounds and even the way that things like hair are rendered,” he said.

Signs of hope persist.

At Red Barrels, which made the indie horror game series “Outlast,” the company doubled its head count to 90 over the past nine years. Despite tough times across much of the industry, big hits still breed lucrative business — and lots of optimism.

“It’s our best year so far,” said Morin, referring to revenue. Sales for the PC-based version of the firm’s 2024 release “Outlast Trials” neared $40 million in its latest fiscal year.

Images of the game’s hollowed-out streetscapes and sewer-green lairs that hang framed on the studio walls belie the laid-back office atmosphere. Foosball and shuffleboard tables furnish the converted loft space in Montreal’s Old Port neighbourhood, and stuffed animal versions of game characters render the ghoulish adorable.

The team has found success in building slowly — “we would never add 20 to 30 people in just a few weeks” — and being “very cautious” with risk, Morin said. And the success of Red Barrels’ latest release has given it breathing room in a sputtering market.

The small size of studios that make up the bulk of Quebec gaming companies lends them greater agility, he added.

“You can feel where the wind is blowing and then adjust.”

However, it also leaves them vulnerable to changes in the sector, said Carmel Smyth, president of CWA Canada, which represents some game developers.

“There’s a lot of anxiety in the industry,” she said.

This report by The Canadian Press was first published July 12, 2026.

Christopher Reynolds, The Canadian Press