In business, there will always be layoffs. It’s the hard truth, but the bottom line is always a strong indicator of the financial well-being of a business. For those of you that don’t know how the “bottom line” is calculated, it is simply revenue (sales) minus expenses (you know, money you spend). This week, Microsoft announced roughly ten thousand layoffs company wide. This is likely in preparation for a recession and their inevitable acquisition of Activision which will cost roughly 70 billion dollars, so they must cut costs somewhere to maintain a bottom line that is palatable to their investors. The Xbox wing of the company was not immune (makes sense due to the aforementioned acquisition almost exclusively affecting this division of the company) and both Bethesda and 343 Studios were hit hard. The comments sections did not take this news too well, and I understand why fans of certain franchises are crushed by this news.
I’m a senior accountant, a lot of the work I do involves budget analysis. While I am by no means an expert on Microsoft’s financial statements, I think I can shed some light on their decision making. I’m going to go out on a limb here and assume Microsoft classifies their many divisions as their own subsidiaries and then has consolidated financial statements which capture all subsidiaries in totality. This makes it easier for a company to accurately assign revenue and expenses to the appropriate division of the company, making budget decisions far more cut and dry. Seeing as acquiring Activision is undoubtedly characterized as an Xbox expense, it makes business sense that they will also bear the brunt of the cuts necessary to pull it off.
Boring accounting talk over, how did we get here? Why does Microsoft need to make cuts in the Xbox division in order to acquire Activision? Well, that’s unfortunately simple, they have financially underperformed going as far back as the release of the Xbox One. Not to rehash ancient history, but the launch of their third console was botched. They came out with a box that was $100 more expensive than their competitors as well as being less powerful and initially requiring the doomed Kinect. Then Xbox failed to publish any real console selling exclusive games. Given that historically, software sales have driven gaming profits, why would anyone buy a more expensive and less powerful console to purchase the same games you can play on the competitor’s console without access to any of said competitors’ exclusives (it really didn’t help that Sony put out banger after banger this time around)? Xbox was very aware of this in real time and did take steps to rectify it. To their credit, they hired Phil Spencer to run the Xbox division. Phil is a gamer and a realist. He knew that Xbox game studios were struggling to put out quality games, so he pushed Xbox Gamepass hard. Gamepass is fantastic, and extremely consumer friendly. It’s essentially Netflix for games. In 2017, Xbox released a mid-generation console refresh in the form of the Xbox One X, bringing Xbox back to the top in terms of console power. Then, he pushed for the acquisition of third-party studios Bethesda and Activision.
Despite Phil’s best efforts, Xbox did not make enough revenue to absorb Activision without consequence. Gamepass is wonderful and a revenue stream relatively new to gaming, but subscription sales come with the trade-off of first-party titles being available day one, meaning revenue from software sales will inevitably take a hit. The One X was a great console for 2017, but gamers still had little reason to purchase it over Sony’s offerings. The Xbox Series X, along with every electronic component known to man, suffered severe supply chain issues which limited the revenue generated from console sales as well as Gamepass subscriptions. The purchase of Bethesda has yet to really pay dividends for Microsoft either. While Bethesda’s subsidiary studios have been releasing multiplatform games since the acquisition, Bethesda Game Studios has not. Bethesda has not launched a traditional “Bethesda game” since 2015. The much-anticipated Starfield was delayed out of the initially planned 2022 launch window and will not be released until some time in 2023. The Elder Scrolls 6 is still a long ways away and likely will not launch until the end of this console generation. They do have 2 “live-service” games currently running, but the Elder Scrolls online is very old at this point and well beyond its peak in profitability, and Fallout 76 was a complete dumpster fire at launch and I would be shocked to learn if it became profitable. One can only assume Microsoft looked at this and saw Bethesda as being too bloated given their lack of revenue and relative inactivity in comparison to previous console generations. Oh right, the COVID excuse. Look, I understand most companies were not equipped to have their employees sent home for an extended period, but that is not an excuse for a 2-year hiatus from any form of productivity. ID Software was able to launch Doom Eternal from home and release two campaign DLC’s in the following year! Arkane studios launched Death Loop and made significant headway on Red Fall, Machinegames co-developed the Quake remaster, and Tango released Ghost Wire Tokyo. All those companies are owned by Bethesda and made something out of a terrible situation. Frankly there is no excuse for Bethesda’s lack of progress. Hopefully Starfield will be a hit if it ever releases and those lost jobs can be recovered, but there must be some return on investment first.
But BrendawnoftheDead, 343 has produced 5 profitable games, why did they get the same treatment. I’m so glad you asked. First, profitable does not necessarily mean successful, especially when revenue projections are missed with Microsoft’s Flagship Franchise. Remember, Halo Combat Evolved helped launch Xbox as a brand and revolutionized console shooters. Under Bungie, 5 extremely successful Halo titles were launched and kept Microsoft at the top of the console sale charts (which means more software sale revenue). When Bungie left Microsoft, 343 Studios was created to become the steward of Microsoft’s beloved franchise. To quickly recap, 343 has produced Combat Evolved Anniversary Edition (outsourced), Halo 4, The MCC, Halo 5, & finally Halo Infinite. At minimum, 3 out of 5 failed to meet their revenue projections, I’m not sure about CE Anniversary to be completely honest. CE Anniversary is remaster of Halo Combat Evolved. This was not projected to be a top selling game, so it was outsourced to Saber Interactive. The remaster allows you to play the original game with its original presentation, or with remastered visuals. Unfortunately, most Halo fans find the remastered visuals to be over-designed and fail to capture the tone of the original. So really, all this remaster does is make Combat Evolved more easily accessible. Halo 4 most certainly hit its revenue target, but it came at a cost. Fans were desperate to see the new direction of the franchise, so it sold gangbusters out of the gate. But then, the player-base took an absolute nosedive shortly after launch. Halo 4’s multiplayer was nothing like the arena shooter fans knew and loved, but a Call of Duty clone in a Halo(ish) coat of paint. The single player was adored by critics but disliked by most fans as they did not take well to the liberties taken with Halo’s lore, the change in art style, Promethean enemies/ weapons, and gameplay. The Master Chief Collection is where shit really hits the fan with 343. What was supposed to be a celebration of the franchise turned out to be an absolute disaster. The multiplayer was essentially supposed to allow playlists of Halo’s greatest hits, but it did not work. You could not get into a game. When this was fixed, the multiplayer was discovered to be a buggy mess. This was not fixed to an acceptable state until 2019, when the MCC was released on PC, 5 years after its Xbox release! To add insult to injury, the original servers for all games included in the MCC, worked just fine throughout, so there was no reason to suffer the pains of MCC multiplayer. While the MCC is a fantastic purchase today, it is too little too late. Next we have Halo 5, where fans and critics actually agreed. The single player outing offered is the worst in the series. The multiplayer eventually became a solid experience but was ridden with pay-to-win microtransactions and launched missing many features that were standard in previous titles. Finally, we have Halo Infinite, a game that took 6 years to develop. Planned to be a launch title for the Xbox Series X/S, Infinite was not ready and was delayed a full year. When it finally released, we had the campaign and a free to play multiplayer…but that’s it. No promised split screen co-op (or online), no forge, no custom games, no playlists, no firefight, limited maps, limited game modes, server issues, d-sync, etc. While the campaign was not perfect, it was fairly well-received amongst players and critics, but as a Gamepass title, revenue from software sales took a hit. The multiplayer being free to play lead to a substantial player base a launch, but it quickly died off after players realized how little content there was available. Free-to-play games rely on consistent content updates to drive in-game purchases and Infinite’s live-service support has been abysmal. 343 Studios were founded for a single purpose, to continue creating Halo games (the most important Xbox game). It is fair to say that their performance has not lived up to the fans’ expectations, nor the financial expectations of Microsoft’s FLAGSHIP FRANCHISE! Why wouldn’t you make budget cuts with the studio that has yet to get a project right?
This blog was not meant to be overly negative, just a realistic take on Microsoft’s business decision making process. It is no different than any other for-profit organization out there. As a fan of the Halo franchise, it hurts seeing people let go who were actively working on improving Infinite. Microsoft isn’t dumb, they know that the single-player has already maximized it’s monetary potential given Infinite’s business model, so it was time to cut bait. So much for the “10-year plan” and I guess that campaign DLC (something new to Halo) is never coming. Those few left at 343 still working on Infinite are surely just trying to salvage the multiplayer, as that is where Halo Infinite’s revenue (battle pass) was always going to come from. But 343’s performance does not justify their incurred expenses. As a fan of the single-player Fallout and Elder Scrolls games, it sucks seeing Bethesda having to layoff employees. But it has been seven years since they released a game proper, SEVEN YEARS. What is Microsoft paying this much for if they aren’t releasing new games? The Activision acquisition serves two purposes. Firstly, they release the best-selling game every single year and Microsoft needs first party studio output. Secondly, they will make a killing in the mobile market (Candy Crush…) which will help ensure the future of Microsoft’s gaming ambitions. On a final, and more cynical, note we have executive and company bonuses. Bonuses based off the company bottom line are extremely common and you had better believe Microsoft participates in this practice. It is well known that company performance is directly correlated with the effectiveness of management, but it is also well known that management rarely pays the price for failure. They often play the blame game as they “fail their way up” to bigger opportunities. I have little doubt that studio management is mostly responsible for the budget cuts and have even less doubt that they will be the least affected by them.
