The Drum Awards Festival - Extended Deadline

-d -h -min -sec

Digital Transformation Microsoft Activision Blizzard

Microsoft gaming layoffs ‘logical’ post-Activision acquisition, experts say

Author

By Kendra Barnett, Associate Editor

January 26, 2024 | 9 min read

On the tails of its acquisition of Activision Blizzard in October, the tech titan this week laid off nearly 2,000 employees from its gaming division.

Microsoft building

Microsoft is gearing up to compete more aggressively in the gaming industry / Adobe Stock

Microsoft laid off 1,900 employees from its Xbox and Activision Blizzard divisions this week – just three months after the company completed its $68.7bn acquisition of Activision Blizzard. The cuts represent about 8.6% of Microsoft’s gaming staff.

The news comes in a string of layoffs that have rocked the tech world in the last year and a half.

“It's a very difficult time for publishers, developers, studios and gaming tech platforms, as more and more layoffs continue to materialize,” says Alex Ginn, vice-president of demand, UK and EMEA at iion, an advertising platform for brands and game publishers. “However,” he says, “the actual consumer market is ever buoyant and positive.”

He’s right. Data from the US Commerce Department released last month indicates that, despite an outsized number of layoffs in the tech and media space of late, the economy at large is looking healthy. Consumer spending is high and, in the fourth quarter, gross domestic product grew at the annualized rate of 3.3%, following a Q3 growth rate of 4.9%.

The robust state of the US economy makes major waves of tech layoffs all the more perturbing.

“These losses are painful,” says Greg Kahn, chief executive officer at GK Digital Ventures and an expert in emergent technology and media. “And these layoffs most of us consider jarring in light of healthy economic numbers showing inflation stabilizing along with decent GDP growth.”

In the gaming space in particular, there may be a variety of contributing factors. For one, the boom of mobile, console and PC gaming during the early days of the pandemic may have led to “over-exuberant hiring and spending,” says Harry Lang, vice-president of marketing at Kwalee, a UK-based video game developer.

Today, Lang says, “back in the realm of reality, many firms found they were overextended – leading to these mass redundancies. It's hurting a lot of excellent businesses and many extremely talented people.”

But these factors, Lang, Kahn and Ginn all agree, were not the impetus for Microsoft’s decision to axe staffers this week.

On the heels of its Activision Blizzard buyout – which faced an antitrust challenge from the US Federal Trade Commission but was ultimately given the green light – Microsoft was forced to assess its costs.

As Lang puts it: “A significant reduction in headcount was one way to pay off some of the $69bn purchase price.”

In an internal company memo obtained by The Verge, Microsoft Gaming CEO Phil Spencer explained to staffers that the layoffs are part of a larger plan to “[identify] areas of overlap” post-acquisition.

It’s a development that Ginn says he predicted in early 2022 when Microsoft signaled its interest in acquiring Activision Blizzard.

“An expense as high as $69bn, in this turbulent day and age for gaming, could never come without repercussions for staff on both sides of the merger,” he says.

Another contributing factor may be Microsoft’s $10bn investment in OpenAI last year and its ongoing focus on AI development internally. Google and Amazon, for example, both underwent rounds of layoffs last year at the same time that they dedicated more resources to AI development.

A strategic advantage

But Microsoft’s latest layoffs, according to some, also have the potential to strengthen its position in the gaming market against its biggest competitors.

In short: Microsoft strengthens its bottom line if it can operate and grow its burgeoning gaming division with less overhead.

“The layoffs represent the consolidation of Microsoft’s gaming division. That allows the company to turn its attention to moving forward on its competitive strategy against Sony, Nintendo, its primary gaming rivals,” says Kahn. “It’s also looking at comparative upstarts like Roblox, which has done so much to advance the gaming landscape.”

It’s widely believed that much of Microsoft’s motivation in snapping up Activision Blizzard lay in its desire to take over the developer’s large content library – which includes games like Call of Duty, World of Warcraft and Candy Crush. Microsoft’s previous role in the gaming market was relegated primarily to device-making: it manufactures Xbox. But competitors like Sony and Nintendo have long operated their own gaming studios and developed games – many of which have loyal, global followings. Microsoft’s acquisition of Activision Blizzard was ultimately a strategic move designed to enable it to eat up a larger portion of the gaming market by giving it control over more intellectual property.

“If there’s one thing that defines gaming success [today,] it’s licensing and intellectual property, as opposed to having a best-selling console system,” Kahn told The Drum in an interview last fall. “The former is wide open in this increasingly decentralized world; the latter is limited by the constraints and trends associated with a particular hardware product.”

By securing Activision Blizzard’s iconic games, he says, “Microsoft immediately is catapulted into the center of gaming with a dedicated player community, which builds on the company’s existing consoles, PC and cloud gaming offerings.”

Emergent tech poses new hurdles

Its newfound strength in the market doesn’t negate the fact that Microsoft will face a slate of new challenges as gaming evolves in tandem with emergent technologies. Development of cloud gaming, decentralized, blockchain-based experiences and AI-driven gaming is gaining momentum by the day.

Roblox is already a leader in gaming and represents the vanguard of blockchain-based experiences. Netflix, meanwhile, is hard at work diversifying its content offerings with a growing collection of cloud-based streaming games. (The streaming platform debuted 86 games last year and has more than 90 currently in development).

Meanwhile, Apple’s Vision Pro headset is set to shake up the gaming space in significant ways. Its spate of spatial games, including Game Room, What the Golf? and Super Fruit Ninja engage players in new, immersive ways. This model of gaming could have, in Kahn’s estimation, “huge implications for collaborative and creative workplaces, healthcare, and education.”

The advancement of new tech in gaming will only create new challenges for legacy gaming companies like Microsoft, Sony and Nintendo. They’re challenges that Microsoft will take in stride, Kahn predicts. He’s confident that, in 2024, “Microsoft will be accelerating its experiments in AI and immersive experiences within gaming environments.”

At the same time, the company is likely looking for new ways to generate revenue from advertising and content partners.

Inspired by the proliferation of commercial experiences on Roblox – where brands like Chipotle, Hilton, Adidas, Walmart and others have found success with limited-edition experiences and virtual pop-ups – Microsoft is bound to be investing in new partnership opportunities within the realm of immersive gaming. “It’s an area Microsoft has been eyeing for a while and as Apple’s Vision Pro generates more interest in mixed reality, you’re going to see Microsoft act more aggressively in that area,” Kahn says.

And in light of Microsoft’s strong position in the market today, he expects that “brands and content companies are going to be responding with immediate enthusiasm.”

More layoffs to come?

Despite the fact that Microsoft’s gaming layoffs may not have been a direct result of unfavorable economic conditions, many experts believe that tech and media layoffs are likely to continue in 2024.

“All the major layoffs we observe right now might be [in service of] cost optimization and adjustments to the market that can offer the same skills and competencies for less money,” says Iryna Chuhai, chief marketing officer at gaming content production company WePlay Studios. “As terrifying as they might seem at first sight, the major layoffs at Microsoft and also Riot Games are pretty logical to me.”

But there’s hope ahead, Kahn says. “As the economy continues to gain strength, these skills will still be in strong demand. I also expect those experiences and the democratization of AI will spur many of these people to start their own companies. Don’t be surprised if you see a spate of acquisitions by big tech within five years of startups begun by the very people whose jobs they cut this year and last.”

For more, sign up for The Drum’s daily newsletter here.

Digital Transformation Microsoft Activision Blizzard

More from Digital Transformation

View all

Trending

Industry insights

View all
Add your own content +