Microsoft's mystifying mismanagement | This Week in Business

This Week in Business is our weekly recap column, a collection of stats and quotes from recent stories presented with a dash of opinion (sometimes more than a dash) and intended to shed light on various trends. Check every Friday for a new entry.

The big news this week was Microsoft taking an axe to the ZeniMax studio system, shutting down Hi-Fi Rush developer Tango Gameworks, Redfall studio Arkane Austin, and Mighty Doom maker Alpha Dog Studios. Roundhouse Studios will also cease to exist, with Microsoft saying the team will join ZeniMax Online Studios.

People often associate layoffs with a struggling company that must get rid of people because it doesn't have the money to pay them anymore. That is absolutely not the case here. This is at least the fourth round of layoffs at Microsoft in the past year-and-a-half, a span which has been the most profitable stretch in the company's history.

This is at least the fourth round of layoffs at Microsoft in the past year-and-a-half, a span which has been the most profitable stretch in the company's history

STAT | $20.2 billion – The average of Microsoft's reported quarterly profits since Q2 FY23 (the three months ended December 31, 2023), when it laid off less than 1,000 people. That was followed in January of 2023 by layoffs for 10,000, cuts of an additional 1,900 game division employees in January of 2024, and this week's closures and cuts.

STAT | $15.8 billion – The average of Microsoft's reported quarterly profits for the 11 quarters before that, the period stretching back to the beginning of the pandemic, which was already a boom time for the company.

Wow, Microsoft sure does make a lot of money. Fortunately, the company is re-investing all that money into its operations to improve the business further, right?

STAT | $8.4 billion – Microsoft returned $8.4 billion to shareholders in the form of share repurchases and dividends in its most recently completed quarter. Because why would you want to invest in things or keep successful and productive studios around when you can essentially burn that money to goose the share price a bit?

STAT | $7.5 billion - How much Microsoft spent to acquire all of ZeniMax. Just so we all have a frame of reference here.

But those earnings numbers are for Microsoft as a whole, and the Xbox business doesn't seem to be going quite as well. It doesn't seem to have meaningfully changed its market share, and things are tough all over for the industry. At least that's what everyone tell us, with years of eager investment and across-the-board growth replaced not by an industry-wide crash but expectations of mild near-term declines and more modest growth for the foreseeable future.

QUOTE | "The thing that has me most concerned for the industry is the lack of growth. And when you have an industry that is projected to be smaller next year in terms of players and dollars, and you get a lot of publicly traded companies that are in the industry that have to show their investors growth – because why else does somebody own a share of someone's stock if it's not going to grow? – the side of the business that then gets scrutinized is the cost side. Because if you're not going to grow the revenue side, then the cost side becomes challenged." – In an interview with Polygon last month, Phil Spencer says that when the growth stops, cutting costs is the way to go.

It was a nice bit of "line must go up" candor from Spencer, but of course, that's not exactly how Xbox executives communicated the news of this week's cuts internally.

QUOTE | "These changes are grounded in prioritizing high-impact titles and further investing in Bethesda's portfolio of blockbuster games and beloved worlds which you have nurtured over many decades. To double down on these franchises and invest to build new ones requires us to look across the business to identify the opportunities that are best positioned for success." – Xbox Game Studios head Matt Booty, in an email to Xbox staff (reprinted by IGN) informing them of the closures.

Nobody likes the realization their employers would shove their entire professional lives into a furnace without hesitation if there was an outside chance it would nudge the share price up

That's some sharp linguistic jujitsu to keep morale up. After all, nobody likes coming face-to-face with the realization their employers would shove their entire professional lives into a furnace without hesitation if there was an outside chance it would nudge the share price up. But if you can convince them this carnage is for their own benefit as well as shareholders? That's a C-Suite skill right there.

"Look, it's just the company getting rid of some dead weight so it can put even more resources behind whatever it is that you're doing! And we'll even invest in new franchises because it's important to dangle a carrot of creatively fulfilling work in front of you. After all, studies have shown that people who have given up all hope tend to be less productive than those who have only given up 95% of hope. Sure, hundreds of your old co-workers' lives have been derailed and some of them probably aren't going to bounce back from this and will be plunged into a spiral of despair that ends nowhere good, but you're still employed for the moment and you might conceivably benefit from their misery. Isn't that great?

"And no, when I say you might benefit, I don't mean like, with a raise or anything like that. Didn't you see the layoffs over there? [Gestures in such a way as to cover up the Net Income column on the latest financial report] These are lean times and you should be grateful you have a job at all. But you will absolutely benefit in that the project you're assigned to might receive the staffing and resources it needs to be something special, something that catches the industry's attention and earns critical acclaim. You know, something like Hi-Fi Rush!"

QUOTE | "Hi-Fi Rush was a break out hit for us and our players in all key measurements and expectations. We couldn't be happier with what the team at Tango Gameworks delivered with this surprise release." – Xbox Games Marketing VP Aaron Greenberg in April of last year.

In an Xbox staff meeting Wednesday reported on by Bloomberg, Booty also praised Hi-Fi Rush, and said Arkane Austin wasn't shut down because of the disappointing Redfall, raising questions about whether the work developers do has any bearing at all on their continued employment.

To hear Booty tell it, maybe it doesn't.

QUOTE | "Booty said that the company's studios had been spread too thin – like 'peanut butter on bread' – and that leaders across the division had felt understaffed. They decided to close these studios to free up resources elsewhere, he said." – A passage from the Blooomberg report.

That idea was somewhat echoed in the meeting by ZeniMax's head of studios Jill Braff.

QUOTE | "It's hard to support nine studios all across the world with a lean central team with an ever-growing plate of things to do. I think we were about to topple over." – Braff says the closures will make management's job easier by giving them less to manage. I'm certain that's a tremendous comfort for those they just laid off and all their rank-and-file colleagues still with the company, at least until the next time management decides it's too tough to manage all these dang employees.

What I'm hearing from all this is that leadership screwed up and grew the operation beyond leadership's ability to lead, and now it's time for someone to pay for that mistake because you simply cannot abide waste in any form when you're barely scraping by on $20 billion in quarterly profit. Also, the someones who will pay for it had nothing to do with those mistakes, and possibly even delivered games the company "couldn't be happier with." And even if they produced a flop, that had no bearing on the decision to shut the studio down.

Burnout, baby, burnout

That reminds me of this very informative talk I attended at GDC 2023 where Take This clinical director Dr. Raffael Boccamazzo talked about six different factors that push people toward burnout.

1. Workload - Are you consistently given more work than you can realistically do? Scope creep can add to this, as can layoffs and the resulting job consolidation.

This week's studio closures might not directly apply here because the teams' work presumably is not being redistributed to others, but the multiple waves of cuts at Microsoft in the past couple years absolutely would.

2. Reward - Are you rewarded properly for your contributions? This is not just pay, but also recognition in personally meaningful ways. Pizza parties don't cut it.

I'm going to say having studios shuttered despite making games like Hi-Fi Rush creates a culture where people do not feel properly rewarded for their contributions.

3. Control - Can you affect how you work and what you work on? Are your tasks dictated from the top down, or do you have input on things like your schedule, where you work from, and so on?

On the micro-scale this will vary from person to person, but given the comments about management spread too thin, it sounds like Microsoft execs want to get more hands-on with the projects. When Redfall flopped, one problem Spencer pointed to was Microsoft not taking a more active top-down role in the game's development.

4. Community - Do people have a sense of belonging at work? Or are there divisions, subtle or overt, based on full-time or contractor status, identity, disability status, job role, or even department? Anything that reduces belonging contributes to burnout.

This could vary greatly by studio or department in such a massive organization, but Microsoft's prediliction for kicking people off the team probably doesn't foster a sense of belonging.

5. Fairness - Are the policies, rules, procedures, promotions and disciplinary measures applied equally to everyone, or are there certain people who seem to be disproportionately impacted?

This Xbox leadership team has made a number of missteps over a long stretch of time and kept their jobs while a lot of developers under them have done what was asked of them and lost theirs, so there definitely seems to be a fairness issue there.

6. Values - Are the company's goals in alignment with your values as an employee, and is the company consistently enacting its stated values? Does the company talk about putting people first but its actions prioritize profits instead?

This depends on the individuals in question, but Microsoft is pretty clearly prioritizing profits over people here, so as long as Microsoft's people also prioritize profits over themselves, everything should be fine, right?

STAT | 6 out of 6 - The number of burnout factors that are aggravated by layoffs like the ones we've seen from Microsoft over the past couple years.

Xbox execs might be looking forward to an easier job with fewer teams to manage, but it will get harder in a hurry if the people remaining start burning out at an accelerated rate.

As if this wasn't disheartening enough, Microsoft may just be getting started, as Bloomberg reports it has begun offering voluntary severance packages for a number of staff at ZeniMax, and says people at Xbox have been told to expect further cuts.

Fewer, bigger, better?

Going by the townhall discussion and Booty's email to staff, it sounds like Microsoft is pursuing a 'fewer, bigger, better' strategy that a slew of third-party publishers have adopted in the past 15 years, including the new centerpiece of the Xbox gaming business, the recently acquired Activision Blizzard.

STAT | 47 – The number of new releases from Activision Publishing and Blizzard Entertainment in 2010, according to MobyGames. And we're not even counting the special editions or compilations.

STAT | 4 – The number of new releases from Activision Publishing and Blizzard Entertainment in 2023: Crash Team Rumble, Call of Duty: Modern Warfare 3, Diablo 4, Warcraft Rumble.

That precipitous drop can be chalked up to the fewer, bigger, better strategy as well as its constant companion, the live service game strategy. After all, Activision Blizzard did a lot more last year than just launch four games. It also provided ongoing content updates for Call of Duty Mobile, Call of Duty Warzone, Candy Crush, World of Warcraft, Diablo Immortal, Overwatch 2, and more.

The 'fewer, bigger, better' strategy Activision Blizzard has embodied is almost directly opposite the strategy Microsoft has been taking for years

The thing is, the 'fewer, bigger, better' strategy Activision Blizzard has embodied is almost directly opposite the strategy Microsoft has been taking for years now.

QUOTE | "I don't want to seem like we're going out to fill a quota. It's not about filling a spreadsheet by any means. We will, however, have an interest in studios right now that fit this criteria of 50-to-100 people, who are making games on a two-to-three year cadence, and have content that we think will be of interest to our Game Pass subscribers. That means content that is a little different to what our big AAA franchises can deliver." – In a 2018 interview, Booty explicitly says the company strategy was not fewer, bigger, better but more, smaller, and… well, the intent was probably not worse, but let's say different. (And of course, there would still be those big AAA franchises like Halo, Gears of War and the like.)

What Booty is describing there as the ideal acquisition candidate is not very far at all from Tango Gameworks. From 2014 to 2023, the studio released five games, which lines up with that two-to-three release cadence. There was The Evil Within and its sequel, Ghostwire: Tokyo, the short-lived mobile game Hero Dice, and Hi-Fi Rush. The studio put out consistently well-reviewed titles that stood out from the crowd, even if they weren't blockbuster hits.

Tango Gameworks would have fit right in with the slew of studio pick-ups Microsoft made dating back to its 2018 E3 presentation when it announced the acquisitions of Ninja Theory, Playground Games, Compulsion Games, and Undead Labs, purchases which were followed within a year by Obsidian Entertainment and InXile, and Double Fine Productions.

With the exception of Forza Horizon developer Playground (currently working on Fable), those studios were acquired to make exactly the kind of smaller games Microsoft's strategy now seems to be turning away from. And with word that there are more cuts on the way, I don't know why any of them should feel secure in their future with Microsoft.

Who even knows what would please these people?

QUOTE | "We need smaller games that give us prestige and awards." – As reported by The Verge, Booty emphasized in yesterday's town hall meeting that Microsoft still wants games like the smaller, prestigious, and award-winning Hi-Fi Rush.

Who even knows what would please these people? They say they're focusing their resources on bigger games, then they say they need smaller games. They say they love your games, then they shut your studio down. They make more money than they've ever made before, then they cut costs repeatedly, drastically, and cruelly. They buy more studios than they can manage, so the answer is not to use that aforementioned money to hire more (or perhaps better) managers, but to have fewer studios so management's job can be easier.

Never mind feeling secure, I'm not sure why anyone who works for Microsoft would feel anything other than the Sword of Damocles hanging above their heads every moment of every day, a sword held in place not by something as tangible as a hair but by something as mercurial as an executive whim.

The rest of the week in review

Microsoft didn't say how many people were involved in this week's cuts, so we tried to ballpark it ourselves with some publicly available (but outdated and unofficial) numbers.

STAT | 126 – The number of different Tango Gameworks employees credited on MobyGames for Hi-Fi Rush.

STAT | 156 – The number of different Arkane Austin employees credited on MobyGames for Redfall (four of them on a contract basis).

STAT | Under 30 – The number of Alpha Dog Games employees with LinkedIn profiles.

STAT | 38 – The number of different Roundhouse Games employees credited on MobyGames for Redfall. It's unclear if developers at the Wisconsin-based Roundhouse will be allowed to work remotely once they are integrated into ZeniMax Online Studios or if they are being asked to relocate to Maryland to keep their jobs.

It looks like we're talking about 300 to 350 people at those Bethesda studios who lost their jobs this week.

QUOTE | "For years, Microsoft has been talking about finding the next billion gamers. It was promising a future filled with different games, reaching different audiences, through different channels and with new ways of paying for it all. With every passing announcement, I grow concerned that it's giving up on that dream." – Our own Chris Dring has his own thoughts on the Microsoft layoffs.

QUOTE | "On the larger end, it feels like it's crushing under its own weight a little bit. The consumers are so tied up in some of these really fantastic live service games, but there's only so much time they can spend. So there are more and more huge games being launched asking for an enormous amount of time, but there's just not that much time available for people to play." – Devolver Digital co-founder Nigel Lowrie said some things to us at GDC that make me think Microsoft chasing the 'fewer, bigger, better' approach is going to do a lot more to bolster the number of obscenely expensive AAA games that faceplant than it will do to show the kind of growth Microsoft shareholders demand.

Microsoft might be investing a ton of money into big new games intending to steal players and engagement from Fortnite, Grand Theft Auto Online, or Roblox, but how much of the ground it gains in that attempt will come at the expense of Call of Duty, World of Warcraft, and Minecraft?

STAT | $1.66 billion - EA announced plans to repurchase $5 billion of EA stock over the next three fiscal years, which averages out to $1.66 billion each year.

STAT | 52% - $1.66 billion of stock repurchases this year would be 52% more than the high end of EA's forecast for net profits for the entire fiscal year, which top out at just $1.09 billion.

QUOTE | "Based on our early assessment, we believe that more than 50% of our development processes will be positively impacted by the advances in generative AI." – EA CEO Andrew Wilson says generative AI will make the company a whole lot more efficient.

Just think of how much more EA stock could then be bought back with all those savings!

STAT | 85,000 – The number of LinkedIn followers of Amir Satvat, a business development director at Tencent who started publicizing game job openings and job-hunting resources a year and a half ago.

It is beyond depressing that there is so much demand for such things right now.

STAT | $270 million – Roblox's net losses in the first quarter of 2024. It has never had a profitable quarter, and it is expecting to lose more than $1 billion over the course of 2024.

STAT | 20% - Nintendo is forecasting a 20% drop in revenues for its fiscal year ending March 31, 2025, suggesting some very lean times ahead. And while it hasn't ruled out a Switch successor launch entirely, it has only said the system would be announced during this fiscal year, and its projections do not factor in any contributions from such an offering.

QUOTE | "PC/console PUBG: Battlegrounds saw its monthly active users and sales reach the highest figures since the F2P transition in 2022." – In announcing earnings with sales up 24% year-over-year and profit up 30% year-over-year, Krafton's quarterly earnings show that some companies in the industry are still growing just fine.

QUOTE | "Banning TikTok is so obviously unconstitutional, in fact, that even the Act's sponsors recognized that reality, and therefore have tried mightily to depict the law not as a ban at all, but merely a regulation of TikTok's ownership." – TikTok, in its legal challenge to the US' recently adopted law forcing Chinese company ByteDance to sell the platform by January or have it banned in the US.

QUOTE | "More often nowadays, we witness video game soundtracks being right there at the top of the charts of soundtrack productions. I can tell you that the Baldur's Gate 3 soundtrack was at the top of Amazon, iTunes, months after its release, to the surprise of everyone including myself! And when I say charts I don't mean the video game music charts, I'm talking about film, musical, every single soundtrack production out there." – In speaking with Marie Dealessandri at the Game Music Festival in London, Larian composer and music director Borislav Slavov reflects on the strides game music has made in recent years.

QUOTE | "I feel compelled today to let my industry friends know that I left DeepWell late 2023, along with almost all of the games industry colleagues I brought to that company. [I] have absolutely nothing to do with the game they released today on the Quest store (which they called Zengeance) and which my colleagues also asked to have their names removed from." – Former DeepWell co-CEO Mike Wilson doesn't seem to have parted on good terms with the mental wellness gaming company he co-founded two years ago.

QUOTE | "Due to technical issues at the launch of Helldivers 2, we allowed the linking requirements for Steam accounts to a PlayStation Network account to be temporarily optional. That grace period will now expire." – Sony last week, trying to pull the ol' live service switcheroo and impose a new requirement on Helldivers 2 PC players, even though the game was being sold in dozens of countries where you can't create a PlayStation Network account.

I particularly like how they frame the lack of account linking as an act of benevolence, suggesting customers should not be outraged that they were charged full price for a game they will no longer be able to play just a few months after release. No, instead they should be thankful for a "grace period" during which the company allowed them the honor of playing the game without Sony dictating absolutely every last aspect of the experience.

So how'd that go over?

QUOTE | "Helldivers fans – we've heard your feedback on the Helldivers 2 account linking update." – Sony struck a very different tone in its Sunday night announcement saying that, upon reflection, it had decided not to be an indefensible dirtbag on this issue and would not be mandating the account linking after all.