Source: Xbox

It's been a busy month for Xbox. Early May saw the closure of four prominent ZeniMax studios: Arkane Austin, Japan-based Tango Gameworks, mobile studio Alpha Dog Games, and internal support outfit Roundhouse Games. A week later, Activision Blizzard announced brand new AAA studio Elsewhere Entertainment, based in Poland. Xbox is also preparing for its annual games showcase on June 9th, and the likely announcement of adding Call of Duty to Game Pass.

Let’s first unpack what the four closed studios were about:

  • Arkane Austin was initially set up in 2006 as the French studio’s American satellite. Arkane was acquired by ZeniMax in 2010 and went on to develop the well-received first-person shooter Prey in 2017. Its sophomore effort Redfall (2023) was not received as well.
  • Tango Gameworks was founded in Tokyo in 2010 by survival horror legend Shinji Mikami. ZeniMax acquired it soon after. The studio is most known for The Evil Within horror franchise, as well as last year’s rhythm action game Hi-Fi Rush.
  • Alpha Dog Games was a mobile studio based in Halifax, Canada. It had been active since 2012 and is best known for the Archero-inspired Mighty Doom, which will sunset in August.
  • Roundhouse Games was ZeniMax’s internal support studio. Roundhouse is not closing, but instead getting absorbed into ZeniMax Online Studios to support the live operations of Elder Scrolls Online.

Among the closures, Tango Gameworks stands out. Hi-Fi Rush performed well commercially according to Xbox marketing exec Aaron Greenberg, and it earned widespread praise as one of the best Xbox games of 2023. So industry insiders and gamers alike are left asking: If Hi-Fi Rush doesn't cut it, then what does?

Not only is Tango Gameworks a fan favorite studio with a great, relatable story, but Xbox executives have not handled the aftermath as gracefully as they’d have hoped. Newly-promoted executive Sarah Bond's interview was heavily criticized, emails that did not age well were dug out, and another executive Matt Booty practically said that games like Hi-Fi Rush are what Xbox needs, days after closing the studio that made it.

Let’s look at the broader context of Microsoft’s gaming business and its restructuring efforts:

  • Microsoft finally closed the Activision Blizzard acquisition late last year. Xbox now owns major franchises like Call of Duty, Warcraft, and Candy Crush. This change inevitably leads to a reassessment of priorities.
  • Xbox’s revenues were flat last quarter when discounting the impact of the acquisition. In the past five years Microsoft has poured billions of dollars into Game Pass content, but subscriber growth has stalled – there is tremendous pressure to cut costs.
  • Microsoft has a newly-found focus on AI. The world drastically changed during the MSFT-ATVI acquisition, which was announced in January 2022. OpenAI's ChatGPT took the world by storm in October 2022, and when the biggest gaming deal in history finally closed in October 2023, Microsoft had already become a different company. Xbox now finds itself in a mothership that has changed direction.

Phil Spencer's Microsoft Gaming division has three subsidiaries: ZeniMax Media, Activision Blizzard, and Xbox Studios. The ZeniMax studio closures came just a few months after Microsoft laid off roughly 1,900 Activision Blizzard employees in January. That's two out of three – nobody wants to be a doomsayer, but further layoffs at Microsoft Gaming, and Xbox Studios specifically, wouldn't be entirely unexpected.

More importantly, does Microsoft’s overall games strategy even make sense right now? On one hand, Microsoft is shutting down high-performing studios and suggesting a newly-found focus on blockbuster franchises. On the other, it is still yearning for indie darlings and is even setting up entirely new studios focusing on new AAA concepts. All this in the shadow of the billions sunk into Game Pass.

Plus, there's huge tension between what it takes to win in subscription services (great content playable everywhere) versus traditional hardware (great console exclusives). Xbox likely can't walk that tightrope forever and will eventually need to pick a side. Doing so would require even larger shake-ups.

Until recently, Microsoft looked like it was willing to play the game for as long as it takes with its first party content and Game Pass licenses. Right now, it looks like its games business is being torn in multiple directions, while the parent company is laser-focused on AI. Taking all this into consideration, it’s very likely we have not heard the last of the shake-ups at Microsoft Gaming.

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