How Did Xbox Get Here?

Xbox once vowed to “Power Your Dreams.” These days, it just wants to keep the power — meaning the lights at its Redmond, Washington HQ — on.

On Monday, new-ish Xbox CEO Asha Sharma announced “the most significant restructure in Xbox history,” including the loss of 3,200 jobs (1,600 today) and four studios: Compulsion Games (We Happy Few, South of Midnight), Double Fine Productions (Keeper, PsychoNauts), Ninja Theory (DmC: Devil May Cry, Hellblade: Senua’s Sacrifice) and Undead Labs (State of Decay).

Owned by the mighty Microsoft, the Xbox division has been pumped full of investment until it nearly burst. Sharma’s unenviable job is to trim the fat before this whole thing blows up. She’ll spend the next year doing exactly that.

“Our business today is not healthy. We are operating at margins that are 3-10x lower than comparable platform and publishing businesses,” Sharma wrote, in part, in a memo to employees. “We must reset XBOX.”

Xbox has had more than a few swings and misses since the Xbox 360 gave way to the Xbox One. NYU Stern School of Business video games professor Joost van Dreunen counts 15 acquisitions over the past 13 years. The most prominent — and the most expensive at $69 billion — was Call of Duty-maker Activision Blizzard, which bloated the balance sheet like Augustus Gloop.

“You start building an empire this large, you lose track of the different provinces and components,” van Dreunen told The Hollywood Reporter.

First, quality control was sacrificed, both in terms of software and market research. Then the innovation died. As it turns out, the sum of the parts had been far better than the whole.

“It is neither possible nor desirable to own every great independent studio,” Sharma wrote. “We have also learned that we are not the best home for every type of studio; in a typical year, we lost 64 cents for every dollar we invested.”

Xbox played the grow-or-die game we’ve seen do so much damage to the film and television ecosystems in the streaming era. It chose to “grow” at all costs, and because of those costs, nearly died anyway. It is a cautionary tale in an industry of cautionary tales.

In the 1970s and early ’80s, before the Nintendo Entertainment System (NES) and with all due respect to Mattel’s Intellivision, Atari had the home video game console market completely cornered. Greed, hubris and a Steven Spielberg blockbuster ruined Atari and nearly tanked the home video game industry forever.

E.T. the Extra-Terrestrial lit up the box office in the summer of 1982. Wanting to replicate the success on its Atari 2600 console for the same year’s holiday season, Atari made two huge mistakes: 1) It gave developers just five weeks(!) to create and complete the game, and 2) It preordered 12 million cartridges — there were 10 million Atari 2600 homes at the time.

The game was awful, and Atari ended up burying (at least) hundreds of thousands of the unsold cartridges in the New Mexico desert. Symbolism has never been so spot on.

When subscription services became all the rage — again: thanks, Netflix! — in a mad rush to stock its Game Pass library, Xbox built a bunch of small and midsize games that added no value. Revenue and margins were ignored for scale, as Xbox became a “bureaucratic mess,” in van Dreunen’s words. Sharma’s words read pretty much the same.

“Today, in some parts of the company, work passes through as many as 14 layers of management,” she wrote. “We will reduce management layers to no more than 5, and where possible, 3.”

Xbox, like the broader entertainment ecosystem (including its direct competitors in Sony and Nintendo), has also been caught in a cyclone of macroeconomic factors. AI has “wildly exposed” Xbox,” van Dreunen told THR. The Trump tariffs, his war in Iran, a shortage of hardware components due to the data-center boom, and currency exchange rates for Japanese Yen have decimated any available margins, forcing Xbox especially to raise its hardware prices — several times. (Sharma did roll back some Game Pass subscription rates.)

The price hikes, especially those for Xbox’s now aging Series X and Series S consoles, have not gone over great with gamers.

“They forget that they’re still part of a market,” van Dreunen said.

This particular marketplace is unforgiving.

“History is full of companies that mistake longevity for inevitability,” Sharma closed her email, vowing: “We will not be one of them.”

As an Xbox gamer himself (me too), Van Dreunen is “optimistic” in Sharma’s ability to right this ship.

“As a game company,” he says, Xbox “still has a lot of merit.” (It also has Minecraft — expect Sharma to lean even harder on that franchise, which, in a reverse-ET spawned a blockbuster movie last year.)

The turnaround may or may not take place at the aforementioned 1 Microsoft Way. Van Dreunen says he can certainly see a future in which Xbox ix “divested entirely from Microsoft.”

“It starts with these partial divestments that we see today,” he said. “It’s incredibly painful, and it’s incredibly sad for a lot of people, [but] any change at this point is preferred to continuing down this road where we’re slowly watching this thing sink.”