Microsoft Cuts Xbox Studios Loose in Latest Round of Gaming Layoffs

Microsoft is breaking up parts of the gaming empire it spent years assembling. In a memo shared with staff and obtained by Kotaku on July 6, Xbox CEO Asha Sharma laid out plans to spin off two studios, sell two others to outside buyers, and put a third — the developer of the upcoming Blade game — through a formal review of its future. The moves come alongside a fresh round of layoffs that will eventually cut around 3,200 jobs, a restructuring Sharma described in her memo as the most significant in Xbox's history.

The studio shakeup touches some genuinely notable names. Double Fine Productions, the Tim Schafer-founded studio behind Psychonauts 2, and Compulsion Games, which made this year's South of Midnight, are both "transitioning" back to independent status after operating under the Xbox umbrella. Both studios will keep the rights to all of their intellectual property, including work created during their time as part of Microsoft. Microsoft is also kicking in what it's calling runway funding, meant to help each studio get new projects off the ground and line up future publishers or investors.

Ninja Theory and Undead Labs are heading somewhere different. According to Sharma's memo, both studios have signed contracts to "join new ownership." Microsoft hasn't said who's buying them. Each will get funding to finish and expand the games currently in development — Ninja Theory's Senua project and Undead Labs' State of Decay 3 — but once the deals close, they'll no longer be Microsoft studios.

Then there's Arkane Lyon, the studio working on the vampire-hunting action game Blade. Its situation is murkier and shaped by geography: because Arkane Lyon is based in France, it's subject to local labor law, which requires the studio to enter a formal consultation with its Works Council before any changes to its ownership or structure can move forward. That process, described in the memo as a review of "potential strategic options," means Arkane Lyon's future is genuinely undecided for now, unlike the studios that already have deals in place.

The scale of the cuts

The headline layoff number is stark: roughly 3,200 Xbox employees are losing their jobs, per the internal memo Kotaku reviewed. About 1,600 of those cuts took effect the same day the memo went out, with the remainder to follow over time. Xbox subsequently posted the full memo publicly.

The studio spinoffs and sales are a meaningful piece of that total. A source who spoke to Game File told the outlet that selling off and separating these studios accounts for more than 300 jobs leaving Microsoft's gaming division altogether — those employees go with the studios rather than being laid off outright, but they're no longer part of Microsoft Gaming.

Not everything is getting swept up in the restructuring. It's been reported that Hideo Kojima's horror game OD, being developed for Xbox, won't be affected by any of these changes.

How the studios are responding

Compulsion Games addressed the news directly on Bluesky, thanking Xbox for their time together and framing the shift as the start of something new. "As an independent studio, we're excited to continue building the distinctive games that define Compulsion while taking the next steps in our journey," the studio wrote, adding that its immediate focus is supporting its team through the transition.

Double Fine, meanwhile, posted its own statement shortly after the memo circulated. "Once again, Double Fine Productions will be an independent studio," the studio wrote. "We're thankful to Xbox for seven great years together, and for working with us to reach an outcome which preserves our history and culture, and returns ownership of our games to us." The post also thanked fans who'd reached out in the weeks leading up to the announcement, saying the studio would share more details on its next steps soon.

Why this matters

Microsoft's gaming division has spent years on an acquisition spree, buying up studios and eventually swallowing Activision Blizzard in one of the biggest deals in the industry's history. This latest move runs in the opposite direction: rather than consolidating more development under Xbox, Microsoft is actively shedding studios it once brought in-house, while also cutting thousands of jobs across the division.

For Double Fine and Compulsion, the outcome could be read as a relatively soft landing — they keep their IP, get transition funding, and regain the independence they had before being acquired. For Ninja Theory and Undead Labs, the picture is less clear until Microsoft reveals who's taking ownership. And for Arkane Lyon, the process is still playing out, with French labor protections giving its employees and works council a formal say before any decision is finalized.

What's consistent across all of it is the direction of travel: Microsoft is narrowing its footprint in game development, even as some of the games these studios were building — Senua, State of Decay 3, Blade — remain officially in the pipeline for now.