Psychonauts developer Double Fine has responded to the reports of its potential closure with a single emoji.

The San Francisco studio is one of a number of Microsoft-owned developers reportedly fighting for their future amid a significant shakeup at Xbox that is expected to result in layoffs across the gaming business later this month. Hellblade developer Ninja Theory, which announced its new game Senua at Xbox Games Showcase just over a week ago, and South of Midnight maker Compulsion are also reportedly in negotiations with Microsoft over a potential buyout in a bid to avoid closure.

Tim Schafer’s Double Fine is perhaps most famous for the Psychonauts franchise. Microsoft bought the studio in June 2019 and signed on as Psychonauts 2 publisher. Double Fine then released Keeper in 2025 and Kiln earlier this year, both of which were not commercial hits.

Yesterday, The Game Business reported that Xbox Game Studios boss Craig Duncan had stepped down. News of various Microsoft studios potentially closing down was not far behind. IGN has asked Microsoft for comment but it is yet to respond.

Double Fine did issue a single emoji social media post, summing up how it feels right now: a smiling face with open mouth and cold sweat.

According to Bloomberg, Compulsion, Ninja Theory, and Double Fine aren’t the only Microsoft studios currently negotiating with Xbox to try to avoid closure. There is the potential for some or all to buy their way to independence, although that would likely come alongside layoffs, too.

Earlier this month, new Xbox boss Asha Sharma warned of a company "reset" that most took as a signal that Microsoft planned big layoffs and studio closures. One analyst told IGN "the studios most exposed are brilliant for prestige and rotten for the spreadsheet." Microsoft was then said to be speeding up development on new The Elder Scrolls, Fallout, and Halo games as it considered restructuring or even spinning off its gaming branch.

Sharma's ground-shaking memo revealed that Microsoft's gaming business currently has a 3% accountability margin (assumed to mean profit margin), which is down year-on-year. "Excluding Activision Blizzard King, over the past five years, we have spent over $20 billion on ongoing investments in our content, platform, and hardware subsidy, but our annual revenue has declined nearly half a billion during that time. Going forward, this cannot continue," Sharma said.

Following the release of the memo, Microsoft CEO Satya Nadella said "there's more monetization of Xbox games happening on YouTube" than at Xbox, adding that the Xbox team needed to figure out how to "innovate both in hardware, as well as in the games, going forward in an economically viable way."

"No one can accuse Microsoft of not having invested for the last 25 years," Nadella added. "Now, we have to turn this into a sustainable business that delivers what is fundamentally one of the best sources of entertainment, still."

This week’s news marks a significant U-turn on Xbox brand sentiment, after Sharma had started to turn core fans around with a number of crowd-pleasing changes such as the decision to make The Coalition's Gears of War: E-Day and inXile's Clockworld Revolution console exclusives. The Xbox layoffs are expected to come into effect at the end of Microsoft's financial year on June 30.

Photo by Christian Petersen/Getty Images.

Wesley is Director, News at IGN. Find him on Twitter at @wyp100. You can reach Wesley at wesley_yinpoole@ign.com or confidentially at wyp100@proton.me.