Xbox Parts Ways With Four Studios, Over 3,000 Layoffs Announced

Xbox has announced it is splitting from four of its development studios – Compulsion Games, Double Fine Productions, Ninja Theory, and Undead Labs – while announcing plans to reduce headcount by over 3,000 employees over the next several months. 

CEO Asha Sharma sent a lengthy message to the entire Xbox team detailing her previously announced plans for a “reset” of the brand and its operations. 

“Our business today is not healthy,” Sharma writes. “We are operating at margins that are 3-10x lower than comparable platform and publishing businesses. We entered Gen 9 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. We must reset Xbox.”

South of Midnight

Regarding certain studios that had reportedly been considered for closure, they will either go independent or be sold to a new owner. “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,” writes Sharma. “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 we reset Xbox, we will help independent creators succeed by providing open development tools and audiences to realize their vision.”

Compulsion Games (South of Midnight) and Double Fine (Psychonauts) will once again become independent studios and retain their IP and game catalogs. These developers were purchased by Xbox in 2018 and 2019, respectively. Compulsion Games and Double Fine each posted messages confirming this news on social media.

Ninja Theory (Hellblade) and Undead Labs (State of Decay) have “entered terms to join new ownership with funding to complete and grow Senua and State of Decay 3,” according to Sharma. Both of these titles are targeting a 2027 release. The specifics of this deal, such as the identity of the new owner(s) of Ninja Theory and Undead Labs, are unknown. It has been reported that Xbox had already planned to split from Ninja Theory before revealing Senua during the Xbox Games Showcase in June, and showed the game anyway to attract a potential buyer. State of Decay 3, first announced in 2020, also had a new trailer during that showcase.

Senua

The fate of Arkane Studios (Dishonored) is less clear. Sharma states the Lyon-based team has entered the required consultation in France with its Works Council to “review potential strategic options.” The studio is currently making Marvel’s Blade, which has reportedly faced cancellation. 

Layoffs will hit other studios such as Activision, Bethesda/Zenimax, Blizzard, King, Mojang, and Xbox Game Studios. Approximately 3,200 employees will be laid off throughout fiscal year 2027; 1,600 employees will be terminated today. Despite this reduction in headcount, Sharma confirms none of Xbox’s publicly announced games or projects will be canceled. Mojang and King will also now report directly to Sharma. 

In a reset of operations, Sharma has announced the promotion of Helen Chiang, corporate VP at Microsoft and head of Mojang, to chief operating officer (COO) of Xbox. Chiang will replace the previous COO, Dave McCarthy, who is retiring today after a 17-year career at Xbox.

To help streamline management, Sharma states that management layers will be reduced to no more than 5 and, where possible, 3. “Today, in some parts of the company, work passes through as many as 14 layers of management. Our platform teams are 40% larger than they were at the start of this generation, even as our player base and playtime have declined. That complexity has slowed decisions, blurred accountability, and made it harder to deliver for players. As we reset XBOX, we will simplify,” writes Sharma.

Sharma ends her message by stating her ambition for Xbox to return to growth in 2027 and to become “one of the few companies that entertain more than a billion people each day and gives everyone the opportunity to create and connect.” 

“History is full of companies that mistake longevity for inevitability,” Sharma writes. “We will not be one of them.”