Microsoft dashes game developer dreams

Microsoft for years has been an active acquirer of gaming companies, including small independent ones. But that may be changing.

Driving the news: The tech giant on Monday announced a giant restructuring of its Xbox unit, including thousands of job cuts and the divestiture of five gaming studios.

Two of the studios (Ninja Theory and Undead Labs) have undisclosed buyers, while two others (Double Fine and Compulsion Games) will be spun out to their founders.

A process to divest the fifth studio, France's Arkane, is just beginning.

What they're saying: "Our business today is not healthy ... We must reset Xbox," group CEO Asha Sharma wrote in a memo. "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 [on small/mid-sized studios]."

Catch up quick: Shortly after becoming Microsoft CEO in 2014, Satya Nadella joined a Fortune conference in Aspen where he talked excitedly about the company's growth opportunities in gaming. Not just hardware, but the games themselves.

His first big swing was on Mojang Studios, the Swedish maker of Minecraft. That was followed by a $7.5 billion acquisition of ZeniMax in 2021, which included Arkane, and then its $63 billion buy of Activision Blizzard in 2023.

Meanwhile, former Xbox boss Phil Spencer complemented those deals with a spate of smaller acquisitions.

Look ahead: Sharma's memo argued that the moves are more about reorganization than retreat, with Game File's Stephen Totilo reporting that there could be additional investment in the Minecraft platform.

At the same time, however, it's hard to see her breaking out the M&A checkbook any time soon.

The bottom line: Microsoft just dashed the dreams of gaming developers, and their VC backers.