Looming Xbox layoffs threaten Microsoft’s reputation on acquisitions | Opinion

The games industry has seen round after crushing round of layoffs over the past few years – a consequence largely of an over-extended industry recoiling from dramatically higher interest rates, though some terrible strategic decisions and even some fairly misguided notions about the likely productivity impacts of generative AI have also played a role in some cases.

Regardless of the underlying causes, these layoffs have been brutal. Above all, the human cost and disruption for workers and their families has been awful, but companies carrying out the layoffs don’t emerge unscathed either. Large-scale layoffs crater morale and undermine workers’ confidence in the company, usually resulting in a steady stream of top employees (the people the company absolutely didn’t want to lay off) departing over subsequent months as they seek to leave what feels like a sinking ship.

Projects die, studios are shuttered, and reputations – both corporate and personal – are left in tatters.

If that sounds like pretty much the worst-case scenario for a company to end up in, I’d generally agree with you – but this week I think we’ve seen something even worse, albeit only marginally. Microsoft is apparently teeing up another large swathe of layoffs which will fall heavily on the Xbox division, making this the fourth time that the division has been targeted for cuts in the past year and a half (the company has not commented on the matter).

Slashing through those companies’ headcount with a machete risks entirely destroying the value of the studios

What makes this worse than a regular layoff situation is that this is apparently common knowledge across the business community and widely reported in the press, all before those being targeted in the cuts have received any notification to that effect. The atmosphere this week within the various Xbox studios and divisions is by all accounts funereal, as everyone waits anxiously to find out where the axe will fall and whether their job or even their entire project will survive the coming days.

Even after so many rounds of layoffs at so many companies, Microsoft’s fresh round of cuts does feel especially galling precisely because of what’s potentially going to be cut – namely, staff from companies that Microsoft has spent close to $100 billion acquiring over the past few years.

Of course, assembling a new Xbox publishing arm and studio system through a long series of acquisitions, including buying two major publishers (Zenimax and Activision Blizzard) along with a large number of studios and smaller firms, was always going to result in some overlapping functionality that would be trimmed – these are the “efficiencies” always talked about in announcements of mergers and acquisitions.

These cuts, however, have surely already gone well past identifying such “efficiencies”, especially if the rumoured scale of the upcoming layoffs is anywhere close to being accurate.

A lot of internet commenters talking about these rumours express bafflement about the logic behind buying up companies only to tear through them with layoffs, and in this instance, the bafflement is entirely fair.

In a specialised industry like videogames, every acquisition is really an acquihire to a large degree. While IP is also valuable, of course, the main point of Microsoft’s enormous spending spree was to build up a leading first- and third-party publishing enterprise by buying companies that had spent years and years finding talent and meshing it into teams – years and years which Microsoft simply didn’t have if it wanted to quickly become a relevant player in this market.

Large-scale layoffs crater morale and undermine workers’ confidence in the company, usually resulting in a steady stream of top employees departing

Slashing through those companies’ headcount with a machete risks entirely destroying the value of the studios it paid such a high price for only a few years ago, and feels incredibly short-sighted at best – especially given the ambitious and very difficult path Xbox is determined to launch into with its console and platform strategy in the coming years, much of which relies implicitly on the idea that Microsoft will continue to strengthen its position as a publisher.

The whole situation recalls an earlier era of the industry: the decade or so in which EA was on a massive acquisition spree, buying up legendary studio after legendary studio, but gained an incredibly negative reputation for utterly destroying the value in everything it acquired (Westwood, Bullfrog, Mythic, and Pandemic being among them).

EA spent a long time trying (earnestly, if somewhat imperfectly) to turn that around; it recognised that you simply cannot stay on top of a rapidly evolving industry if everyone from studio bosses to the dogs in the street view your acquisition activities as a kiss of death.

Microsoft isn’t at that point yet, and hopefully it will never get there – but it wouldn’t take that much mismanagement or that many studio closures for its reputation to hit the same set of skids.

This is quite a different situation to how acquisitions usually work in the tech industry, where it’s fairly common practice to buy up lots of small companies simply to get your hands on key technologies, staff members, or even clients, and nobody really cares how you manage the acquired company since it fairly rapidly ceases to exist and is subsumed into your wider corporate structure.

Game studios don’t work like that. They’re creative teams producing widely loved and closely followed consumer products, and require a very different management style to ensure that they thrive after an acquisition.

There is a valid concern over whether there are enough people in decision making positions within Microsoft who are aware of things like how damaging EA’s era as the industry’s angel of death was to that company, or what’s at risk if Microsoft ends up being tarred with that brush. If that isn’t already clearly understood, and the company instead needs to learn from first principles the importance of nurturing its acquired studios with a view to the long term rather than the quarterly numbers, Xbox may be in for a very bumpy few years.