The sudden closure of several video game studios in Microsoft’s Xbox division was the result of a widespread cost-cutting initiative that has not yet been completed.

Xbox this week began offering voluntary severance agreements to producers, quality assurance testers and other staff at ZeniMax, which it bought in 2020 for $7.5 billion (roughly Rs. 6,26,28 crore), according to People. aware of the company’s plans. Others in the Xbox organization have been told more layoffs are on the way.

An Xbox spokesperson declined to comment.

Employees were shocked by Tuesday’s unexpected closure of three Xbox subsidiaries and the takeover of a fourth. The closures include Tokyo-based Tango Gameworks, which last year released the critically acclaimed action game Hi-Fi Rush. Tango is in the process of pitching a sequel, the people said, speaking on condition of anonymity to discuss non-public information.

During a town hall with ZeniMax staff Wednesday morning, Xbox president Matt Buti praised Hi-Fi Rush but did not elaborate on why the company shuttered the development studio behind it, according to three people who attended.

Speaking about the closing more broadly, Booty said the company’s studios were spread too thin — like “peanut butter on bread” — and that department leaders felt understaffed. They decided to close those studios to free up resources elsewhere, he said.

Booty added that the shutdown of subsidiary Arkane Austin, the longtime developer of games like Prey, was unrelated to the launch of the new multiplayer game Redfall, a critical and commercial failure.

Before its closure, Arkane sought to return to its roots by introducing a new single-player “immersive sim” game as a new entry in the Dishonored series, according to people familiar with the matter.

Jill Braff, head of ZeniMax Studios, said at the town hall that she hopes the reorganization will allow the division, which also develops Fallout and Doom, to focus more on fewer projects. “It’s hard to maintain nine studios around the world with a weak core team with an ever-growing backlog of things to do,” she said, according to audio of the meeting reviewed by Bloomberg.

“I think we would have flipped,” she added.

Both Tango and Arkane released games last year and were looking to hire additional staff while introducing new projects, which Booty and Braff speculated was the main factor behind their closures. Shinji Mikami, Tango’s founder and head of the studio, left last year.

Those cuts at Xbox come amid a larger contraction in the video game industry due to economic changes after a period of rapid growth during the pandemic. Microsoft’s gaming division recently expanded more than any of its competitors through the acquisition of ZeniMax and Activision Blizzard for more than $76 billion combined. In February, Microsoft cut 1,900 jobs, mostly at Activision Blizzard.

The massive acquisition of Activision Blizzard has tightened control of the Xbox division by Microsoft leaders, according to people familiar with the matter.

In recent years, Xbox has invested heavily in Xbox Game Pass, a subscription service that offers unlimited access to hundreds of downloadable games for a monthly fee. To fill the service with new lures, Xbox has acquired dozens of studios, including teams known for making smaller games, such as San Francisco-based Double Fine.

While most game publishers are looking to make big changes with games that cost hundreds of millions of dollars, Xbox has promised to support less stretch creative titles like Hi-Fi Rush with smaller budgets and lower sales expectations. It didn’t matter if a game sold tens of millions of copies as long as it helped bolster the Game Pass library.

But Game Pass hasn’t seen the huge growth that Xbox boss Phil Spencer might have hoped for.

Matt Piscatella, CEO of analytics firm Circana, said monthly non-mobile video game subscription spending in the U.S. “has been steady to low single-digit growth” since mid-2021.

“According to our data, Game Pass spending really had a big growth period in late 2019 through early 2021 and has leveled off since then,” Piscatella said. “Purchasing games and add-on content, as well as free-to-play models, are still the highly preferred method of accessing video games for US consumers, at least for now.”

While there’s no indication that Xbox plans to abandon the Game Pass model, there are hints that its big bets haven’t paid off. Last quarter, sales of Xbox content and services grew 62 percent, but as Niko Partners analyst Daniel Ahmad pointed out last month, the growth was entirely due to the Activision Blizzard acquisition. On social media, he noted that without sales from that deal, Xbox game revenue would have declined roughly 5 percent year-over-year, “with no growth in software and services and a sharp decline in hardware revenue.”

With console revenue in decline, the company recently began releasing some of its games on competing platforms. In a March interview with gaming site Polygon, Spencer said that “the thing that worries me the most about the industry is the lack of growth.”

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