Xbox Studio Shake-Up
Xbox Announces Major Restructuring: 3,200 Employees Laid Off, Four Studios Divested
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Key Points
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Compulsion Games will return to independent management and retain rights to its IP Contrast, We Happy Few, and South of Midnight; Double Fine will also become independent and own its catalog, with 'runway funding' to start development on new games and attract investors and publishers.
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Arkane Lyon’s fate remains uncertain, with Xbox weighing a sale or closure; the French studio is undergoing required Works Council consultation to review strategic options, and Arkane’s Marvel’s Blade project could be impacted by whichever path is chosen.
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Microsoft frames the restructurings around financial realities, noting margins are 3–10 times lower than peers and citing Gen 9’s higher cost base; leadership says the move aims to leverage Game Pass and a broader multi‑platform strategy rather than owning every studio.
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Reports indicate the layoffs at the Studios hit are relatively contained for the moment, with around 300 staff across Double Fine, Undead Labs, Ninja Theory, and Arkane Lyon expected to be affected, while the majority of the studios transition to independence or new ownership.
Microsoft is executing the largest restructuring in Xbox history, laying off approximately 3,200 employees by the end of fiscal year 2027 and divesting four game studios. About 1,600 cuts took effect immediately, bringing total headcount reductions across Microsoft's gaming division to roughly 4,800, according to Complex.
The four studios leaving Xbox are Compulsion Games, Double Fine, Ninja Theory, and Undead Labs. Compulsion and Double Fine will return to independent status. Ninja Theory and Undead Labs are being sold to new owners, per Daily Guardian.
Low Margins and Slow Game Pass Growth Forced Microsoft's Hand
Microsoft pointed to financial strain as the key driver. Xbox margins run 3 to 10 times lower than those of industry peers. The current console generation — Gen 9 — brought a smaller install base and a higher cost structure, squeezing profitability. Game Pass, Microsoft's subscription service, has also grown more slowly than hoped.
Xbox said it will realign spending toward higher-priority projects. Leadership framed the move as a shift toward subscriptions and multi-platform releases rather than owning every studio. No first-party games are being canceled, the company said, according to Daily Guardian.
Compulsion and Double Fine Walk Away With Their IP
Compulsion Games will keep the rights to all of its games — Contrast, We Happy Few, and the newly released South of Midnight. The studio will return to independent management. Double Fine, the studio behind Psychonauts, will also go independent and retain its full catalog, according to OpenCritic.
Microsoft plans to give Double Fine what it called "runway funding" — money to start new game development and attract outside investors and publishers. Both studios' ongoing projects will continue to receive financial support during the transition.
Arkane Lyon's Fate Hangs on Marvel's Blade and French Law
Arkane Lyon, the French studio behind Deathloop, faces an uncertain future. Xbox is weighing a sale or full closure. French labor law requires a formal Works Council consultation before any major decision can be made. That process is currently underway, per OpenCritic.
The studio's biggest project — Marvel's Blade — could be affected by whichever path Microsoft chooses. If Arkane Lyon closes or is sold, the fate of that game remains unclear. Xbox has not confirmed whether Blade's development will continue under new ownership or be transferred elsewhere.
Around 300 Studio Staff Affected Despite Massive Overall Cuts
Despite the headline figure of 3,200 total layoffs, the direct impact on the four divested studios is relatively contained. About 300 staff across Double Fine, Undead Labs, Ninja Theory, and Arkane Lyon are expected to lose jobs, according to Screen Rant. The majority of studio employees will transition to independence or new ownership.
Funding will continue for key in-progress titles. This includes Ninja Theory's Senua project and State of Decay 3 from Undead Labs. Microsoft says those games will move forward under whatever new structure each studio lands in.
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