Dark Days for the Gaming Industry: Xbox Lays Off Staff, Shuts Down a Promising Studio, and Cancels Games

One of the biggest stories of the week is the mass layoffs in Microsoft’s gaming divisions that began yesterday. This move is part of a broader internal restructuring at the company: nearly 9 000 employees will be let go — around 4% of Microsoft’s global workforce. For Xbox studios, this isn’t the first major shake-up this year. However, the consequences of these new layoffs appear even more serious than previous ones: Microsoft hasn’t just let people go — it has also canceled multiple projects, including one of the most anticipated Xbox exclusives. That’s what today’s article is about.

As soon as reports emerged about another wave of layoffs affecting Xbox studios, an internal memo from Phil Spencer was also leaked online. He began the message by explaining the rationale behind the cuts:

Spencer also stressed that despite all this, the gaming division is doing well financially — the layoffs aren’t about performance:

In other words, Microsoft’s gaming division — just like other parts of the company — is aiming for greater flexibility and efficiency, and to cut costs. As a result, some struggling projects and entire studios are being sacrificed in favor of more productive efforts.

The most notable closure is that of The Initiative. This promising studio was founded in 2018 to develop high-quality blockbusters. It initially attracted talent from all over the industry — veterans from BioWare, Naughty Dog, Respawn Entertainment, Santa Monica Studio, Blizzard Entertainment, Insomniac Games, and Rockstar Games. Over the years, The Initiative collaborated with Crystal Dynamics (best known for the Tomb Raider series) on Perfect Dark, a reboot of the iconic spy-action FPS series. The game was designed as a potent mix of shooter, stealth, and immersive sim mechanics.

Last year, during the Xbox Games Showcase, Microsoft revealed the first gameplay trailer for Perfect Dark, which was met with overwhelmingly positive feedback. The project was quickly seen as one of the cornerstones of Xbox’s future lineup. But behind the scenes, development was reportedly troubled — and it now appears the issues were severe enough that yesterday, the game was officially canceled and The Initiative was shut down.

Perfect Dark isn’t the only major title to get axed. Reports also confirm that development on Everwild has been halted. This mysterious project had been in the works at Rare — the studio behind Sea of Thieves — for nearly a decade. Details about Everwild were scarce, though it was often described as “an adventure in a vast open world.” According to The Verge, Wired, and other outlets, Rare was also hit hard by this round of layoffs.

According to Bloomberg, Microsoft also canceled an unannounced MMORPG by ZeniMax Online Studios. Very few details were known — just a codename, Blackbird, and the fact that a 200-person team was working on it as of 2022. With development now shut down, ZeniMax Online is also facing layoffs.

And that’s not all. Turn 10 Studios — the team behind Forza Motorsport — reportedly lost nearly 50% of its staff. The restructuring has also affected King, the developer of Candy Crush Saga, as well as several Activision-owned teams like Raven Software, Sledgehammer Games, and High Moon Studios. Layoffs also hit Blizzard Entertainment, Undead Labs (currently working on State of Decay 3), and the Halo team (formerly 343 Industries).

Windows Central, a reliable source of insider information on Microsoft and Xbox, claims that there’s no need to worry about the future of games showcased at this year’s Xbox Games Showcase. That includes Obsidian, which is reportedly doing well, as is InXile Entertainment, who showed an in-depth gameplay breakdown of Clockwork Revolution.

What remains uncertain, however, is the fate of Hideo Kojima’s mysterious Xbox-exclusive project, OD. Rumors have emerged suggesting Kojima’s partnership with Microsoft has ended, and that he’s now seeking a new publisher. However, no credible sources have confirmed this so far.

There have also been whispers that Phil Spencer may step down as CEO of Xbox once the next console generation begins. But Windows Central has debunked those rumors: Microsoft reportedly has no plans to push Spencer out — the decision will be his alone when the time comes.

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The Xbox situation is just one symptom of a much larger issue. Despite record profits and player engagement, the industry has been facing waves of mass layoffs across both large and indie companies in recent years. The reasons? Skyrocketing development costs, overestimated investments, project overload, the dominance of live-service models, and questionable corporate strategies. The industry’s crisis isn’t due to a lack of money or players — it’s a structural management failure. And sadly, there’s little reason to believe things will improve anytime soon.

How do you feel about these kinds of industry shake-ups? Are you worried about other Xbox projects? Share your thoughts in the comments.