How Layoffs Expose Xbox’s Flawed First-Party Strategy

exit sign
Illustration: Cheyne Gateley/VIP+

With a headcount of more than 200K employees, it was inevitable that Microsoft would be a participant in the wave of layoffs sweeping the tech world.

But cutting roles from internal gaming studios 343 Industries and Bethesda Game Studios is a particularly troubling sign of a first-party operation in need of strategic overhaul as the console brand struggles to keep up with rival PlayStation on releasing exclusive games.

Gaming revenue only accounted for 9% of total revenue in the company’s latest earnings, making it unrealistic to expect video game operations would be shielded from such layoffs.

But next to Mojang and its command of “Minecraft,” 343 and Bethesda represent some of the most important strategic first-party development at the console brand. 343 is the studio that has overseen Xbox’s landmark “Halo” franchise since Bungie parted ways with Microsoft in 2007, while Bethesda Game Studios is the premier team under publisher Bethesda Softworks spearheading the highly anticipated open-world space game “Starfield,” which will be a console exclusive for Xbox.

While the acquisition of Bethesda parent ZeniMax was finalized in 2021, the publisher went nearly two years without releasing any games on Xbox first, a streak recently broken by January’s rhythm-action game “Hi-Fi Rush” from internal developer Tango Gameworks. Tango’s last game, “Ghostwire: Tokyo,” as well as Arkane Studios’ “Deathloop” were released first on PlayStation 5 per deals made with Bethesda prior to the acquisition. “Ghostwire” still hasn’t come to Xbox.

Much is riding on “Starfield” to deliver for Xbox owners, but numerous delays have only highlighted the slowness of new exclusives from Xbox Game Studios, a fact that Microsoft gaming CEO Phil Spencer acknowledged during Xbox’s recent Developer Direct presentation of the many new games it has on the horizon.

As Spencer put it, Xbox was “too light on games” in 2022.

Gaming revenue saw a $684 million year-over-year decrease in the last quarter, which is typically the most lucrative sales period for gaming companies due to the holidays.

While the end of 2021 saw 343’s “Halo Infinite” release to strong sales, the 13% revenue decline a year later was “driven by declines in first-party content and a lower rate of monetization in third-party content,” per Microsoft’s filings. This shows how crucial exclusives can be in countering periods of overall sales decline throughout the industry.

If this were the Xbox Games Studios of old, the lack of exclusives would make sense. Of the 14 studios directly under Xbox, nine were acquired or founded internally in 2018 and 2019 to better match the number of teams at PlayStation. As of the ZeniMax deal’s close, Xbox and PlayStation have the same amount of studios.

So why isn’t Xbox keeping with PlayStation on the first-party front? The issue likely isn’t a matter of size as much as it is corporate management of teams that are new to working directly under Xbox.

Throughout the timeline of PlayStation Studios under Sony Interactive Entertainment, the norm has been to acquire first-party developers after successful launches for exclusives developed in a second-party capacity.

This has been the case with PlayStation’s most lauded studios, as well as its newer acquisitions. “The Last of Us” developer Naughty Dog was acquired by SIE in 2001 following its work on the “Crash Bandicoot” series, while “Ghost of Tsushima” developer Sucker Punch joined the fold in 2011 after having worked on “Sly Cooper” and “Infamous.”

Then in 2019, SIE’s longtime partner on “Ratchet & Clank” and the “Resistance” trilogy, Insomniac Games, was acquired following the massive success of “Marvel’s Spider-Man" in 2018. Similarly, 2021 additions Bluepoint, Firesprite and Housemarque all worked with SIE in a second-party capacity beforehand.

While Xbox had a preexisting second-party relationship with 2018 buys Playground Games (“Forza”) and Undead Labs “State of Decay,” much of its studio additions were only third-party partners previously and struck as a hasty attempt to replicate the scale of PlayStation’s first-party pipeline that has since been overshadowed by the much larger acquisitions of ZeniMax ($7.5 billion) and the pending deal to acquire “Call of Duty” steward Activision Blizzard for a mammoth $69 billion.

Should it go through, the Activision deal can provide a solid bedrock of in-game spending and additional sales revenue through “Call of Duty” and the King mobile unit, meaning more internal financial support for first-party development that can help make Microsoft’s gaming operations more self-reliant.

Until then, the cuts at 343 and Bethesda show that even a company as big as Microsoft can’t easily brute-force its way into granting Xbox the same status that PlayStation has when the latter has put far more time into cultivating close relationships with developers before bringing them fully into the fold.