A new report suggests Xbox layoffs will likely result in a "bloodbath" of job losses and studio closures, leaving developers "punished" simply for following Microsoft's orders.

Word of Xbox staff redundancies and development studio shutdowns is now rife, following an ominous warning from newly-installed Xbox CEO Asha Sharma that the console maker's slim profit margin was no longer sustainable. While it has been reported that Xbox studios such as South of Midnight maker Compulsion Games, Kiln and Keeper developer Double Fine, and Hellblade helmer Ninja Theory are just some of the teams now facing shutdown, the exact details remain unclear and unfinalized.

Microsoft is believed to be timing the layoffs with the end of its financial year on June 30, with talks ongoing among studio bosses over which companies could be sold off, spun out and kept open independently — even if this still results in numerous job losses. IGN has asked Microsoft for comment but has yet to receive a response.

Now, in a new YouTube report from Bloomberg's Jason Schreier, the veteran reporter claimed that "the word bloodbath has been thrown around among people I talk to who know about what's going to happen. It's going to be bad." Schreier's report also delves into the background of why these layoffs are happening now, and suggests that Xbox teams have struggled to adapt as Microsoft's attitudes to gaming and demands of its development teams have shifted over the years.

Long-term, Xbox never really recovered from the Xbox One era, Schreier argued. The Xbox Series X/S has failed to gain back ground in the console war against PlayStation, while the growth of Xbox Game Pass has plateaued. The past decade has seen Microsoft go on a spending spree to gain Game Pass content, buying the very studios that the company now seeks to shut down or divest.

Most notable was the $68.7 billion acquisition of Activision Blizzard, devised by former Xbox boss Phil Spencer during the tail end of the Covid-era gaming boom, but already looking less attractive by the time its lengthy buyout process closed due to the enormous costs involved and a changed economic and strategic landscape.

The past two years have seen the last of the Covid growth era evaporate, Roblox blow up as a major drain on player attention and spending, and AI became a major new focus for tech companies such as Microsoft. These issues all likely contributed to the need for Xbox to meet tougher financial targets from executives, resulting in pressure to cut costs.

"That's when we see things start to get really bad," Schreier said. "We see four mass layoffs in two years, the closure of studios under the Xbox umbrella like Arkane Austin and Tango Gameworks, which wound up going to Krafton which saved that studio, and the cancellation of projects like Everwild, Perfect Dark, and Project Blackbird."

This period was marked by political in-fighting at Xbox as different divisions and executives struggled to gain priority. This also resulted in it becoming far more difficult to get new gaming projects greenlit, and Xbox's multiplatform push to boost profits that saw more games launch for PlayStation 5 and Nintendo Switch.

"The last couple of years at Xbox have been quite messy, people start openly questioning Game Pass and saying it's cannibalizing sales," Schreier continued, referencing the hundreds of millions of dollars reportedly lost by putting Call of Duty in the subscription. "What might be good for the Game Pass folks may not be so good for the studios and revenue brought in for individual games."

All of which brings us to 2026 — when Spencer departed, and Sharma was brought in to "reset" the business in his place.

While Kiln and South of Midnight may not have been big money-spinners, development studios such as Double Fine and Compulsion were simply doing what they had been told five years ago, Schreier said, when they were acquired and their projects were greenlit. Namely, that they were to make games to help fill out the Xbox Game Pass catalog and slowly keep growing its subscriber base, and that this would be enough.

"A lot of these studios made plenty of their own mistakes, but in a lot of ways they're being punished today for following orders," Schreier added. "For listening to what they were told a few years ago. And that is just a shame, and what is going to happen is pretty brutal. The word bloodbath has been thrown around among people I talk to who know about what's going to be happen. It's going to be bad.

"And one of the reasons Xbox studios have struggled to make great games over the past decade is this uncertainty," he concluded. "It's really hard to make great art when working under the fear of layoffs and turbulence and cancellations and shutdowns."

This week, it was alleged that Microsoft announced Ninja Theory's new game, Senua, knowing that it planned to shut the studio down because it believed the promise of a newly announced game would help draw investor interest in the developer. There is now concern that Senua may never come out.

Tom Phillips is IGN's News Editor. You can reach Tom at tom_phillips@ign.com or find him on Bluesky @tomphillipseg.bsky.social