Last month, Microsoft announced its latest layoffs: 9,100 employees (about 4% of its workforce) were cut across all divisions. Microsoft Gaming was hit especially hard. The Initiative, originally built as a prestige studio, closed altogether and its in-development title, the long-awaited Perfect Dark reboot, was canceled. Further project cancellations include Rare’s action-adventure title Everwild and ZeniMax’s unannounced fantasy MMO Project Blackbird. Turn 10, the developer behind Forza, saw its workforce slashed in half, and even King, one of the most profitable Microsoft studios, suffered a 10% reduction in staff. This marks the sixth round of layoffs since early 2024, including the May 2024 studio closures we covered extensively before.

For context, Microsoft employed around 228,000 people in 2024, having aggressively expanded in prior years. On the surface, these layoffs might seem like a long overdue correction as Microsoft repositions toward using artificial intelligence. In many ways, Microsoft’s future is AI; Xbox’s is far less certain. And when creative teams are dissolved, flagship games are shelved, and entire studios vanish, the cracks run deeper than overhiring.

Unpacking Xbox’s Woes

Whether this is a strategic recalibration or something more existential, it’s clear Xbox has fundamental issues. Let’s unpack them one by one.

A portfolio without payoff. After a decades-long studio acquisition spree culminating in the $75B purchase of Activision Blizzard, Xbox has one of the largest portfolios in the game industry. But as of late, it has surprisingly little to show for it.

Redfall was a flop; Avowed and Hellblade II underperformed; and upcoming flagship titles like Perfect Dark, Everwild, and Project Blackbird are dead. There have been bright spots: Indiana Jones and the Great Circle, Doom: The Dark Ages, and recent Game Pass hits like Expedition 33: Clair Obscur and The Blue Prince. 

But the output remains inconsistent. The platform is propped up by Call of Duty, Minecraft, and Diablo IV, which are strong IPs, but not born from Xbox. Despite the scale and backing of one of the richest companies in the world, Xbox feels like it’s missing a creative core.

Hardware has been on a losing streak since 2013. Microsoft’s “Xbox Anywhere” strategy had always been a vague proposition and arguably never made full sense even on paper. In practice, it directly undermines the ability to win in hardware. A successful hardware strategy depends on must-have exclusives that sell consoles. A “play anywhere” approach does the opposite, spreading Xbox’s best content across rival platforms. The result is a content strategy at odds with itself. Bragging about topping PlayStation charts only underscores the problem: You don’t need Xbox to play Xbox games.

Meanwhile, competitors like Sony, and Nintendo even more so, continue to thrive by employing an age-old strategy of proprietary hardware and exclusive, high-quality game content. The PlayStation 5 is outselling the Xbox almost five to one. With Xbox’s sale volumes declining, economies of scale fall apart, making each high-end console more expensive to produce and sell at a loss. As former Xbox leader Laura Fryer puts it, Microsoft may have already lost the desire — and perhaps even the capability — to ship hardware at all. The partnership with Asus on the Xbox-branded ROG Ally handheld hints at a quiet retreat from building hardware altogether.

Microsoft’s gaming head Phil Spencer famously described the Xbox One era as the “worst generation to lose.” Unfortunately, the Xbox Series S and X haven’t done much to turn that around. Complex naming conventions, lingering baggage from the Xbox One, and centering attention on a lower-end console with the Series S haven’t helped. But at the end of the day, hardware lives or dies by its games, and Xbox just hasn’t delivered where it matters most. With its console momentum stalled, Microsoft has shifted its focus to where it still sees an upside: Game Pass.

Game Pass stalls. In February 2024, Xbox executive Sarah Bond announced Game Pass had reached 34 million subscribers. Since then, Microsoft has gone quiet, and that silence speaks volumes — Game Pass subscriber growth has likely plateaued. Whatever the exact number is, it’s a long way off from Satya Nadella’s 100 million subscriber target.

Game Pass relies on day-one releases to drive subscriber interest, but that very model can cannibalize traditional unit sales, especially for tentpole AAA titles that depend on strong launch revenue. For third-party developers, the economics are even trickier: Revenue shares from Game Pass often pale in comparison to direct sales, making it a less attractive platform unless the exposure is massive.

In theory, the subscription model could work brilliantly. But without a hundred million users, the whole model starts to wobble. And right now, Xbox simply doesn’t have that kind of scale.

Xbox no longer fits Microsoft’s strategy. Microsoft's strategic focus is all-in on AI. Xbox, a consumer-facing entertainment business with low margins and creative risk, doesn’t fit that mold. Relative to the colossal scale of Microsoft’s business, Xbox is a small division. Increasingly, it is a distraction as much as a mismatch. Already in 2021, Microsoft reportedly debated winding Xbox down. Instead, it doubled down on Game Pass. But that decision was made before the AI gold rush. Since then, Xbox’s trajectory has been defined more by attrition than ambition.

What Comes Next for Xbox?

So where does Xbox go from here? Let’s walk through some scenarios.

The Windows Strategy 

This is Microsoft’s current path even if it might not admit it publicly. It involves embracing the PC ecosystem: strengthening the PC Game Pass; supporting third-party hardware of which the ROG Ally is the first example; and integrating Xbox across Steam, Epic, and beyond.

Game Pass would still play a role, but the classic Xbox console would gradually disappear. In its place, you’d have a mix of third-party devices (i.e. handhelds and living-room friendly PCs) all running Microsoft’s services. It’s arguably a more consumer-friendly vision, where your Steam and Xbox libraries could coexist.

But is it a good business for Microsoft? Maybe. It boosts Game Pass, but at the cost of control and platform differentiation, both of which are already slipping away. Microsoft might make Game Pass more convenient, but in doing so, it risks losing what makes Xbox unique. Instead of being a platform with its own identity, Xbox could end up as just another app, sitting alongside Steam and Epic, offering games but standing for nothing in particular.

The Pure Publisher

Xbox could also lean all the way into becoming a multiplatform publisher instead of a platform. In this model, the focus shifts from selling consoles or subscriptions to maximizing game sales across every viable surface: PlayStation, Switch, Steam, Epic, mobile, cloud — wherever the audience is.

In fact, with the end of Xbox exclusives, Microsoft has already taken steps in this direction. Game Pass wouldn’t need to die, but it might find its home on PC and become more of a supplemental service than a central pillar. Day-one releases would be rare or reserved for smaller titles, and tentpole titles would prioritize premium sales.

But there’s a catch: Selling content is a weaker business than owning a platform. Platforms control distribution, capture margins, and build lasting ecosystems. Publishers chase hits and pay rent to platforms. For Microsoft, this would be a downgrade that would be hard to reverse.

Spin Off or Break Up 

The more radical option is to separate Xbox from Microsoft entirely. This idea has circulated for years (at least since 2008), and it’s starting to feel more and more reasonable.

Spinning off Xbox would mean appointing new leadership, refocusing the brand, and allowing the company to operate as a lean, gaming-first organization. It would free Xbox from the gravitational pull of Windows. Microsoft’s PC-focused strategy may serve the broader corporate goals well, but what if Xbox did what’s best for Xbox? It could compete directly with Sony and Nintendo again, not as a division within a tech behemoth, but as an independent platform.

Technically, Xbox could take the same path inside Microsoft: wind down Game Pass, reembrace hardware, and refocus on premium exclusives. 

But it seems unlikely to happen. Recommitting to hardware would not only go against the company’s current trajectory, it would amount to a public admission that the last decade’s strategy was a mistake.

Finally, there’s an even more drastic scenario: dismantling Xbox altogether. That would mean sunsetting Game Pass, and spinning out Mojang, Blizzard, King, and Activision as standalone entities or selling them off entirely. Each could likely generate more value with leadership and strategies tailored to their strengths. Microsoft owns some of the most iconic IPs in gaming, Minecraft, Warcraft, Call of Duty, and Candy Crush among them. In different hands, they might get the focus, care, and direction those games deserve.

Conclusion

Xbox used to stand for Halo, online multiplayers, and high-performance hardware. Today, without exclusive games or a meaningful hardware presence, it risks becoming invisible. Xbox is drifting toward a backend service instead of a brand that gamers actually care about.

That said, Xbox is not a failed business. It still has powerful IPs, great talent, and the backing of one of the richest companies in the world. But it’s stuck, and staying the course with a shrinking hardware footprint and inability to ship titles that truly matter may be the worst outcome of all.

Something has to change. Keeping Xbox under the shadow of Windows and Microsoft’s AI dreams limits what it can be. Spinning it out would provide a clean reset: new leadership, sharper focus, and the freedom to build for gamers again.

Xbox needs strategic clarity. And to find it, it must leave home.

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In Other News

💸 Funding & Acquisitions:

• SuperGaming raises $15M to fuel the global expansion of Indus Battle Royale.
• GameRamp raises $5.4M for AI-based in-game economies and monetization.
• Liberty Pixel raises $1.1M for casual and hybridcasual games.
• Gdev acquires Light Hour Games to expand its mobile portfolio.
• Duolingo acquires the majority of London studio NextBeat’s team.

📊 Business & Products:

• Roblox daily active users surges 41% to 112M in Q2.
• Celebrity-driven Global Gaming League signs six AAA game publishers.
• Lyrical Media launches a new indie publisher, Lyrical Games, helmed by Private Division alumni.
• Apple’s revenue rises to $94B in Q3 2025 despite $800M in tariff-related costs.
• Unity pins its hopes on Vector AI ads platform to spark revenue growth.

👾 Miscellaneous:

• Take-Two is overhauling the new BioShock following a failed internal review, says new report.
• My.Games launches a business modeling tool for AdsAdvisor.
• Genshin Impact to sunset on PlayStation 4.
• Blue Ocean Games launches Rising Tide 2 to fund the next wave of indie developers.
• Microsoft reverses $80 first-party price hike to keep "full priced holiday releases in line with current conditions."

Content Worth Consuming

• Hooked in Three Seconds: the Science Behind High-Performing Mobile Game Ads (gamesindustry.biz): “Attention is the main currency in today's world — the precious resource everyone is fighting for. Every second counts, and in the case of the mobile industry, adverts have three seconds to pull the user into your app, or lose them forever in a sea of content. To win this battle and attract high-quality leads, you need to hook users with precision, clarity, and power.”

• Luna Javier Pioneering Play: the First Female Game Developer in the Philippines (Rise and Play Podcast): “In this heartfelt episode, host Sophie Vo sits down with Luna Javier — the first female game developer in the Philippines and a true pioneer with over 20 years of experience. Luna shares her extraordinary journey from an aspiring filmmaker to game writer, designer, and eventually co-founder of Altitude Games. She opens up about the challenges of burnout, the unexpected leap into entrepreneurship, and how she helped shape the Filipino game development industry from the ground up.”

• From Concept to Character: AI Animation Revolution in Gaming (GameMakers Podcast): “Join us for an eye-opening conversation about how AI is completely transforming the game animation industry. Viren Tellis, CEO of Uthana, shares how their technology is enabling developers to animate characters in seconds instead of days, democratizing game development for indie creators.”

• World of Warcraft's Seth Sivak Tips the Dealer (The Fourth Curtain): “Our guest this week is Seth Sivak, VP Development for World of Warcraft at Blizzard. From early years at Zynga he became founder and CEO of Proletariat, shipping big games like Spellbreak. We discuss being an imagineer, the three components of creative decisions and ‘always be pitching.’”

• How Ray Chase Went from Actor to Game Developer with Date Everything (The AIAS Game Maker’s Notebook): “Alexa Ray Corriea chats with actor Ray Chase about his first project as a game developer, Date Everything. Together they discuss his memorable work as the voice behind many of our favorite characters and why he decided to try his hand at development; where the idea to date household objects came from; how they managed to write dialogue for 100+ dateable characters; and how they assembled the immense voice cast.”

• Interview with Wilbert Roget II — Video Game Composer for Helldivers II, Star Wars Outlaws, Pacific Drive (GXM Podcast): “Tom speaks to one of the busiest working video game composers — Will Roget. They chat about projects past and present with Will having had an incredible, BAFTA-winning 2024, not only with Helldivers 2 but also shipping Star Wars Outlaws, Pacific Drive AND animated series Gundam: Requiem for Vengeance.”

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