New Xbox leadership called the games business 'over extended' in an internal memo and warned of 'hard truths' ahead, and the studios reportedly in its crosshairs are the smallest bets Microsoft made when it spent $69bn on games.
Microsoft's new Xbox leadership has a message for the people who make Xbox games: brace for "hard truths." Days after a bullish summer showcase featuring the return of Gears of War, Xbox CEO Asha Sharma and chief content officer Matt Booty sent staff a memo describing the games business as "over-extended" and warning that the company had spent $20 billion on games over the past five years while "annual revenue has declined nearly half a billion," according to a report in The Guardian.
Three of the studios reportedly facing closure are the smallest bets Microsoft ever made in games: Ninja Theory, the UK developer behind the action game Hellblade; Double Fine, the San Francisco studio known for the surreal adventure Psychonauts; and Compulsion Games, the Montreal team behind We Happy Few. Each was acquired as part of a deliberate effort to buy creative risk that big publishers usually avoid, not the proven franchises Microsoft paid $68.7 billion to add when it closed the Activision Blizzard King acquisition in October 2023.
The contradiction is the story. Microsoft, parent of Xbox, posted $217.4 billion in profits in its most recent financial year. The same parent is now using a "hardware component crisis," its own phrase, to justify shrinking the creative pipeline it chose to build. The component crunch the memo cites is the same one straining the high-bandwidth memory, advanced packaging, and NAND flash that Microsoft's own AI infrastructure buildout depends on. The supply pressure on those parts is a direct consequence of the AI capex cycle Microsoft is helping to drive.
The memo's accounting language is unusually blunt. Sharma and Booty wrote that Xbox had spent more than $20 billion on games over the past five years, excluding Activision Blizzard King, and that "annual revenue has declined nearly half a billion." The word "over-extended" is doing a lot of work in those sentences. It reframes a deliberate acquisition strategy, buying studios to take creative chances that internal teams were not taking, as a strategic mistake to be corrected. "Reset," another word in the memo, means the same thing in corporate translation: fewer games, fewer teams, narrower bets.
History gives the language a sharper edge. Bill Gates unveiled the original Xbox at GDC in March 2000, pitching a console that would carry Microsoft into living rooms it had never reached. Twenty-six years later, the company is telling game developers it has changed its mind about what kind of games business it wants to be, and the studios that took the creative risk Microsoft asked them to take are the ones on the chopping block.
Microsoft has not publicly confirmed specific studio closures as of publication. The cuts to Ninja Theory, Double Fine, and Compulsion Games are reported by outlets including Bloomberg and Kotaku, and are consistent with LinkedIn posts from affected staff. The memo, as quoted by The Guardian, acknowledges the human cost in language that doubles as a warning: "hard truths" are coming for the people who make Xbox games.
The forward question is the one that matters. When a cash-rich platform holder retreats from narrative single-player games, mid-budget experimental titles, and the broader AA tier, those categories lose their buyer of last resort. The publishers that once had Microsoft as a backstop for creative risk now have to find another one. The doctrine of "over-extended" that Sharma and Booty are writing into Xbox's playbook is one that other big tech publishers, sitting on their own record cash piles, are likely to copy in 2026 and 2027. The closures, if they happen, will be Microsoft-specific. The reasoning behind them is about to become industry standard.