On July 2, 2025, Microsoft announced 9,000 layoffs across the company, bringing the year's total gaming-related cuts to over 15,300 employees. Among the casualties: The Initiative (shut down entirely before shipping a single game), Perfect Dark (canceled after years of development), Everwild (canceled), and a ZeniMax Online MMORPG that Phil Spencer reportedly couldn't stop playing during demos.
But the layoffs weren't the beginning—they were the consequence of decisions made years earlier. Decisions about Game Pass economics, hardware strategy, studio management, and what "Xbox" actually means in 2025.
This is an autopsy of a brand in freefall.
The Numbers Don't Lie: Xbox Hardware is Dying
Let's start with the hardware—because despite Phil Spencer's insistence that Microsoft isn't "in the business of out-consoling" rivals, console sales tell a brutal story.
2025 console sales (VGChartz estimates):
- Nintendo Switch 2: 10.36 million units (launched June 2025)
- PlayStation 5: 9.2 million units
- Xbox Series X|S: 1.7 million units
- Original Nintendo Switch (2017 model): 3.4 million units
Xbox sold fewer consoles than an eight-year-old Nintendo product.
U.S. market decline:
- 2023: 3.8 million units
- 2024: 2.7 million units (down 29%)
- 2025: Continued decline
European collapse:
- 2024: 550,000 units
- 2025: 290,000 units (down 47%)
Microsoft's own financial disclosures:
- Q2 2024: Xbox hardware revenue plunged 42% year-over-year
- Hardware sales declined in six of the last seven quarters
- Circana data (November 2025): U.S. console hardware spending down 27% YoY, with Xbox seeing the steepest decline
Daniel Ahmad (analyst) estimate: Fewer than 900,000 Xbox units shipped in one quarter when comparable PlayStation shipments were in the millions.
My opinion: These aren't "strategic pivots"—this is a brand in terminal decline. When you're being outsold by hardware from 2017, your product has fundamentally failed to connect with consumers.
Retailers Are Giving Up
In mid-2025, reports surfaced that Costco stopped stocking Xbox Series consoles in multiple U.S. locations.
While anecdotal, retail analysts note that big-box chains don't pull products unless they expect stagnant or negative sales. Costco's floor space is precious—if Xbox consoles aren't moving, they get replaced by products that do.
Microsoft declined to comment on retail distribution changes.
The Game Pass Mirage: Unsustainable From Day One
Game Pass was supposed to be Xbox's salvation—the "Netflix of gaming" that would redefine how people play. Instead, it may have accelerated Xbox's decline.
The Growth Stall
Subscriber numbers:
- January 2022: 25 million (last official Microsoft disclosure)
- February 2024: ~34 million (analyst estimate)
- Mid-2025: ~35 million (analyst estimate)
That's 1 million subscribers added in 15 months.
For context, Microsoft's internal target was 50 million subscribers by 2025. They missed by 15 million.
After hitting 25 million in January 2022, Microsoft stopped reporting Game Pass subscriber counts—a telltale sign that growth had stalled.
The Economics Don't Work
Bloomberg estimated Microsoft spends $1 billion annually on third-party Game Pass content alone.
Leaked FTC trial documents revealed specific costs:
- Assassin's Creed Mirage: $100 million to launch on Game Pass
- Star Wars Jedi: Survivor: $300 million
- GTA IV: $120-150 million annually just to keep it on the service
Microsoft's own estimates (leaked FTC documents):
- Call of Duty: Black Ops 6 on Game Pass: $300 million revenue loss due to cannibalized full-price sales
Analysts estimate Game Pass profit margins at 10-15%—razor-thin for a service Microsoft claims is the future of gaming. Sony's PlayStation Plus, by comparison, runs at approximately 50% profit margin because they spend far less on third-party content and don't put every first-party game on the service day-one.
Industry Pushback: "Unsustainable and Damaging"
On July 5, 2025, Raphael Colantonio—founder of Arkane Studios (Dishonored, Prey)—posted on X:
"I think Gamepass is an unsustainable model that has been increasingly damaging the industry for a decade, subsidized by MS's 'infinite money', but at some point reality has to hit. I don't think GP can co-exist with other models, they'll either kill everyone else, or give up."
Michael Douse, head of publishing at Larian Studios (Baldur's Gate 3), agreed:
"'What happens when all that money runs out?' is the most vocal concern in my network, and one of the main economic reasons people I know haven't shifted to its business model."
Both developers pushed back against Xbox's claim that Game Pass doesn't cannibalize sales. Activision itself stated in leaked documents that subscription services "severely cannibalize buy-to-play sales," especially for day-one releases.
Guillaume Broche (Clair Obscur: Expedition 33 developer) launched on Game Pass specifically for exposure—but noted in an August 2025 interview that "Game Pass doesn't help with sales." The exposure was valuable, but it traded direct revenue for visibility.
My take: Game Pass was always a loss-leader designed to lock players into the Xbox ecosystem. The problem? It didn't lock enough players in, and now Microsoft is stuck with a service that bleeds money while hardware sales collapse. The price hikes (two in 15 months) aren't about "adding value"—they're about desperately trying to make the economics work.
The Studio Massacre: May-July 2025
Between May and July 2025, Microsoft conducted one of the most brutal studio purges in gaming history.
May 7, 2024: The Bethesda Bloodbath
Xbox Game Studios head Matt Booty sent an email announcing the closure of four Bethesda studios:
1. Arkane Austin (Prey, Redfall)
- Redfall's final update released; development ended
- Studio closed despite Prey being considered one of the most underrated games of its generation
- New immersive sim project in early development—canceled
2. Tango Gameworks (The Evil Within, Ghostwire: Tokyo, Hi-Fi Rush)
- Hi-Fi Rush was a critical and commercial success—3 million players, "Overwhelmingly Positive" Steam reviews
- Aaron Greenberg (Xbox VP of marketing) called it a "breakout hit" in 2023
- Tango was pitching a Hi-Fi Rush 2—never got the chance
- Studio founder Shinji Mikami had left in 2023
3. Alpha Dog Games (Mighty Doom mobile game)
- Mighty Doom shut down August 7, 2024
4. Roundhouse Studios
- "Absorbed" into ZeniMax Online Studios (effectively shut down)
Booty's email justified the closures as "prioritizing high-impact titles and further investing in Bethesda's portfolio of blockbuster games."
The Town Hall Disaster
Following the announcement, Xbox held an internal town hall. According to Bloomberg's reporting:
- Booty could not explain why Tango Gameworks was shut down despite Hi-Fi Rush's success
- He claimed Arkane Austin's closure was not tied to Redfall's failure
- He suggested both studios were closed because they'd just shipped games and wouldn't release another for several years
Sarah Bond (Xbox president) was asked directly why Hi-Fi Rush's success didn't save Tango. Her response:
"One of the things I really love about the games industry is it's a creative art form. And it means that the situation and what success is for each game and studio is also really unique. There's no one-size-fits-all to it for us."
That's corporate-speak for "we have no good answer."
My opinion: This was textbook mismanagement disguised as "strategic realignment." You don't shut down a studio that just delivered a hit game unless you've fundamentally lost the plot. The excuse that they "wouldn't ship another game for years" is absurd—that's how game development works. By that logic, every studio should be shut down between releases.
July 2, 2025: The Biggest Wave Yet
Microsoft announced 9,000 layoffs globally, bringing 2025's total gaming-related cuts to over 15,300 employees.
Major casualties:
The Initiative
- Shut down entirely—before shipping a single game
- Perfect Dark (reboot) canceled after years of development and partnership with Crystal Dynamics
- One developer later claimed the Perfect Dark gameplay trailer shown at events was allegedly "fake" or heavily misrepresented
ZeniMax Online Studios
- Unannounced MMORPG canceled
- Phil Spencer reportedly "couldn't stop playing it" during internal demos
- Team learned about cancellation through Slack deactivations—not leadership communication
Everwild (Rare)
- Canceled after years in development
343 Industries (Halo developer)
- Significant layoffs despite years spent fixing Halo Infinite's troubled live-service model
Why Microsoft Doesn't Sell Studios
After the Tango Gameworks closure, many asked: why not sell the studio instead of shutting it down? Employees keep jobs, Microsoft recoups some investment, and the studio survives.
The answer is intellectual property.
Microsoft wants to keep the IPs (Hi-Fi Rush, Dishonored, Prey, etc.) even if it kills the studios that created them. Selling the studio means selling the IP—and Microsoft values IP ownership over developer livelihoods.
As The Gamer noted:
"Despite all its blubbering about wanting to diversify the kinds of games getting released and support studios doing cool stuff, Microsoft would rather kill the studio that made a successful game like Hi-Fi Rush than let someone else profit from the IP."
The Human Cost: An Open Letter and a Lawsuit
On October 10, 2025, 93 former Xbox employees signed an open letter condemning Microsoft's leadership.
The letter alleged:
- Systemic mistreatment
- Mismanagement
- Mishandling of redundancy processes
- Toxic workplace culture
- Concerns raised to leadership were dismissed or mocked
The letter demanded:
- Public apology from Phil Spencer and Matt Booty
- Proper compensation for laid-off employees
Same day: The Independent Workers' Union of Great Britain (IWGB) sued Microsoft for mishandling layoffs.
Phil Spencer: Icon or Architect of Disaster?
On December 22, 2025, Phil Spencer received the Industry Icon Award at The Grand Game Awards.
The timing was... unfortunate.
The show opened by acknowledging 2025's massive industry layoffs. Then they gave an award to the man overseeing 15,300 of them.
Spencer's tenure as Xbox head (2014-present):
Wins:
- Saved Xbox from being shut down by Microsoft in 2014-2017
- Convinced CEO Satya Nadella to invest heavily in gaming
- Secured the $68.7 billion Activision Blizzard acquisition
- Launched Game Pass and Xbox Cloud Gaming
- Expanded Xbox to PC
Losses:
- Xbox Series X|S is the worst-selling Xbox console generation ever
- Game Pass subscriber growth has stalled at 35 million (target was 50 million)
- 15,300+ layoffs in 2025 alone
- Multiple beloved studios shut down
- Major projects canceled before release
- Console hardware in freefall
Community reaction to the award was harsh:
ResetEra comments included:
"They started the award show by talking about layoffs then gave Phil Spencer an award!? LOL"
"Would Phil layoff coffee maker Phil back in the day?"
"Is the coffee maker on GamePass?"
Rumors about Spencer stepping down after the next Xbox console (rumored for 2027) circulated in July 2025. Microsoft CCO Frank Shaw denied them, saying Spencer has no plans to leave "anytime soon."
But the damage to his reputation is done. The man who saved Xbox in 2014 may go down as the one who killed it in the 2020s.
My take: Spencer's strategy made sense in theory—pivot from hardware to services, reach players everywhere, build a Netflix-style subscription model. But the execution has been catastrophic. Game Pass doesn't make enough money, hardware sales collapsed, and the studio closures have destroyed goodwill. He's a visionary who couldn't execute the vision, and now he's presiding over a disaster of his own making.
What Xbox Actually Is in 2025
Phil Spencer's 2023 quote:
"We're not in the business of out-consoling Sony or out-consoling Nintendo. There isn't really a great solution or win for us."
Satya Nadella (Microsoft CEO) in a recent TBPN podcast:
"The company's gaming business model will look to be 'everywhere in every platform,' from consoles to TV to mobile."
In practice, this means:
- Xbox games releasing on PlayStation and Nintendo (Indiana Jones, Hi-Fi Rush, others)
- Next-gen Xbox rumored to be a "PC hybrid" that runs Windows
- Focus on Game Pass, cloud gaming, and PC rather than console exclusives
- Hardware becoming increasingly irrelevant
Valve's Steam Machine (announced November 2025) prompted The Verge to declare: "Valve just built the Xbox that Microsoft is trying to make."
What This Means for Gaming
Xbox's collapse has ripple effects across the entire industry.
1. Consolidation Consequences
Microsoft spent $68.7 billion acquiring Activision Blizzard and $7.5 billion acquiring ZeniMax/Bethesda. Then they laid off thousands and shut down studios.
The message to developers: consolidation doesn't mean stability—it means you're expendable.
2. The Death of Mid-Budget Games
Studios like Tango Gameworks (Hi-Fi Rush), Arkane Austin (Prey), and others made mid-budget, critically acclaimed games that didn't sell 10+ million copies.
Microsoft's "high-impact titles" strategy means: blockbusters or nothing. Mid-tier, experimental games are no longer viable under Xbox.
3. Subscription Model Skepticism
Game Pass was supposed to prove subscription services could sustain AAA development. Instead, it's proven the opposite—unsustainable economics lead to studio closures and layoffs.
Developers are now wary of subscription deals. As Larian's Michael Douse said: "What happens when all that money runs out?"
4. The "Multiplatform Future"
Xbox exclusives going to PlayStation isn't "pro-consumer"—it's a white flag. Microsoft can't sell enough consoles to justify exclusivity, so they're becoming a third-party publisher.
5. What Happens to Call of Duty, Diablo, Starcraft, Warcraft?
Microsoft now owns Activision Blizzard's massive franchises. If Xbox hardware dies entirely, those franchises survive—but what happens to the teams that make them?
If 15,300 layoffs happened during Xbox's "most profitable year ever" (per Microsoft), what happens when profits decline?
The 2027 Question: Next-Gen Xbox or Exit Strategy?
Microsoft is reportedly planning a next-gen Xbox console for 2027. According to sources cited by CNBC and Digital Trends:
- "Open system" that allows players to move between console, PC, and cloud
- Likely a hybrid console-PC running Windows
- Focus on Game Pass and cloud gaming, not traditional exclusives
Sarah Bond (Xbox president) stated in October 2025 that the next Xbox will be "very premium."
Translation: expensive.
The big question: Who is this for?
- Xbox fans who want traditional consoles? They're abandoning the brand.
- PC gamers? They already have PCs.
- PlayStation/Nintendo fans? They have no reason to switch.
- Game Pass subscribers? Most are already on PC or cloud.
My opinion: The next Xbox feels like a Hail Mary designed by committee. A "premium" PC-console hybrid launching in 2027, after years of declining sales and studio closures, priced high in a market that's already rejecting Xbox hardware? That's not a comeback strategy—that's an exit plan with extra steps.
Microsoft might genuinely believe in this product. But belief doesn't create demand. And right now, consumer demand for Xbox hardware is at an all-time low.
The Bottom Line
Xbox in 2025 is a brand in crisis.
Hardware sales have collapsed. Game Pass growth has stalled. Beloved studios have been shut down. Over 15,000 employees have been laid off. Major games have been canceled before release. And the leadership's response has been corporate platitudes and awards ceremonies.
The uncomfortable truth: Microsoft may have concluded that Xbox—as a console brand—is no longer worth saving.
Game Pass will continue. Xbox games will release on PlayStation and Nintendo. Cloud gaming will expand. The Xbox brand will persist as a services platform.
But the Xbox console—the hardware that defined three generations of gaming—is dying. And Microsoft's actions in 2025 suggest they're okay with that.
For developers: The lesson is brutal. Success doesn't guarantee survival. Hi-Fi Rush was a hit—Tango Gameworks was shut down anyway. Critical acclaim means nothing if you don't fit the "high-impact blockbuster" model.
For players: The subscription dream is over. Game Pass was supposed to be gaming's future. Instead, it's a cautionary tale about unsustainable economics and corporate priorities.
For the industry: When the world's second-largest company by market cap (Microsoft is worth ~$3 trillion) can't make console gaming work anymore, what does that say about the console business model?
Maybe Phil Spencer was right in 2023: there is no "great solution or win" for Xbox in the console space.
The question is whether there's a solution for Xbox at all.
Sources: CNBC, VGChartz, That Park Place, Pure Xbox, Windows Central, TechRadar, Digital Trends, NotebookCheck, Spilled, SQ Magazine, Game Rant, GameSpot, Game Developer, Kotaku, VGC, The Gamer, Gamer.org, Outsider Gaming, Outlook Respawn, Bloomberg, FTC trial documents, multiple analyst reports, ResetEra community discussions