Is Xbox broken? Reported studio closures indicate a games industry in crisis, expert says
After years of acquiring studios, Xbox is looking to offload talent as the gaming giant struggles under its own weight. It’s the inevitable consequence of how the industry’s biggest players have operated, an expert said.
Xbox, the Microsoft-owned gaming giant, has sent shockwaves through the games industry as it reportedly considers shuttering several of its game studios and explores significant cuts to its business.
Studios facing the threat of closure include South of Midnight developer Compulsion Games; Double Fine, the legendary 25-year-old studio behind Psychonauts; and Ninja Theory, which had announced Senua, a new game in its psychological action franchise, at the Xbox Games Showcase only a few weeks earlier. All three developers are currently trying to negotiate to go independent, which may still involve major layoffs, Bloomberg reported.
The potential loss of some of the industry’s most innovative developers is troubling enough for an industry already facing mass layoffs. But combined with the rising cost of gaming hardware and declining revenues for some of the biggest studios, including Xbox, the company’s recent moves raise questions about the sustainability of the world’s largest entertainment industry.
Microsoft did not immediately respond to a request for comment.
Xbox’s new CEO Asha Sharma and head of Xbox Game Studios Matt Booty said in a statement that the studio closures are part of a broader effort to “reset” Xbox amid plummeting revenues for its hardware and a pivot to its struggling Game Pass subscription model.
“For some of you, these realities will be surprising and even frustrating to discover,” Sharma and Booty wrote, referencing the company’s investments in studios that it sees as not yet having paid off for Xbox’s long-term strategy or financial bottom line. “We won’t succeed by hiding hard truths, nor will we succeed by doing the same thing and expecting different results.”
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But Celia Pearce, an award-winning game developer and game design professor at Northeastern University, believes that Xbox’s decision is less a “reset” than more of the same. For an industry rocked by years of layoffs and mainstream AAA studios ballooning in size, the news that Xbox could close the top tier teams it acquired in a late 2010s spending spree that saw its collection of studios climb to 30 felt inevitable, Pearce told Northeastern Global News.
“I’m not surprised,” she said of the news. “The mainstream video game industry has been in a decline the last few years.”
Pearce also echoed the fact that Xbox’s trajectory is just a symptom of larger problems plaguing the industry, from an inherently unsustainable business model to corporate consolidation that’s given studios and consumers fewer and fewer options, she noted.
For 20 years, the core economic model used by the industry’s biggest players, Xbox included, involved pursuing better graphics and better tech, but that meant “the more expensive and labor intensive it is to make games,” Pearce explained.
At the same time, the cost of big budget games has only recently increased from $60 to $70. The math for these companies just doesn’t add up, according to Pearce.
“You can’t keep increasing your cost of doing business but keeping the product at the same price point,” Pearce said.
For Xbox, the solution was to increase their gaming output by acquiring a stable of renowned mid-sized developers, like renowned action game studio Ninja Theory and veteran independent studio Double Fine, instead of building internal teams from the ground up. That also came with the mega-purchase of Activision Blizzard, one of the industry’s biggest publishers responsible for popular franchises like first-person shooter series Call of Duty and multiplayer role playing game World of Warcraft, in 2023 to bolster its gaming output.
Excluding the Activision Blizzard deal, Sharma and Booty admitted those investments, which totaled $20 billion over five years, haven’t netted out: In the same period, revenues dropped by nearly $500 million, Sharma and Booty said in their statement.
“Going forward, this cannot continue,”the statement said, noting that the company had found itself “over extended” in its studio collection.
“We have made mistakes, and will continue to make them, but what matters is that we listen, learn and adjust the course where needed,” the executives added.
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The gaming titan’s struggles have not gone unnoticed by its parent company. Previous reports that Microsoft has considered even spinning out Xbox as its own wholly-owned subsidiary indicates the tenuousness of the company’s gaming branch.
Xbox’s rapid growth strategy, and its consequences, are part of a broader trend of corporate consolidation that goes well beyond the games industry, Pearce said. From the Paramount-Warner Bros. merger to the Walt Disney Company’s acquisition of 21st Century Fox in 2019, media and entertainment has become centralized in the hands of a select few companies.
“This is a very normal thing that corporations do” that gives consumers fewer choices and gives companies more power to control prices and access, Pearce said. But it means companies have to deliver profits that justify spending billions of dollars or risk going under themselves, like Warner Bros. did in taking on debt to merge with Discovery Inc.
But Pearce isn’t entirely cynical about the future of the games industry. She has been pleased to see independent games rising in popularity and success amid the struggles of the industry’s AAA players. While studio closures are never a good thing, it does provide a ripe opportunity for highly talented developers to join the indie ranks, she said.
Now, small, independent teams have more options for publishing and releasing their own games than ever before in an ecosystem no longer tied to releasing games in big box stores. As Xbox closes one door, the developers who keep the industry running could open many more.
Ironically, Double Fine, now potentially on the chopping block at Xbox, was founded by creatives who left LucasArts, the legendary choose-your-own adventure game developer, in the late 1990s.
“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,” Pearce said.
