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Gaming is in a weird place right now. There are layoffs happening everywhere, games are getting delayed even as the Switch 2 proves to be a bigger hit than even Nintendo could imagine, and a group of studio executives have accused their publisher of sabotaging the release of a game to avoid a $250 million bill. But none of that is going to impact the industry quite as much as what is happening with the Microsoft Xbox. I’ve been following video games for a long time, and the closest analogy I have is remembering Sega in the wake of the Saturn.

In case you weren’t around, that isn’t good news for Microsoft.

I’ve spent the past few weeks mulling over Microsoft’s latest actions. On July 2, 2025, Microsoft announced that around 9000 employees would be cut from the company. While the exact numbers aren’t known, it is understood that the Xbox division would be taking the brunt of these layoffs. Phil Spencer, who is the head of Microsoft Gaming, released a statement to his team. “To position Gaming for enduring success and allow us to focus on strategic growth areas, we will end or decrease work in certain areas of the business and follow Microsoft’s lead in removing layers of management to increase agility and effectiveness.”

As part of these layoffs, both the Perfect Dark and Everwild games were cancelled. Meanwhile, Doom creator John Romero confirmed that the publisher of his next FPS had cut their funding the following day, which was later confirmed by employees now at risk of layoffs to be caused by the Microsoft debacle. This was a disastrous month for Microsoft and the Xbox, not just because of the initial layoffs, but because it is going to have an impact on how they are going to be seen by the wider industry in the coming years.

This is a lesson that Microsoft seemed to have learned years ago – a key part of a console’s success is how it treats third-party studios. They’re the ones who are going to make the bulk of the games that end up on your console. A larger library makes it more likely people will want to pick up your expensive console as their primary gaming system. It is also where most of the money is in the industry.

Here is a little Insider Baseball knowledge for you. The profit margins on game consoles are razor-thin. For example, even with the increased price, every sale of the Switch 2 makes Nintendo less money than the Switch. The money is actually from game sales. Companies like Nintendo, Microsoft, and Sony get a percentage (which depends on the company and whether the title is sold in physical or digital formats) of every copy of every game that is sold for their consoles, even if they didn’t have an active hand in developing or publishing it.

“The console gaming business is traditionally a hardware subsidy model,” a Microsoft spokesperson said back in 2021. “Game companies sell consoles at a loss to attract new customers. Profits are generated in game sales and online service subscriptions.”

If John Romero, who is one of the most well-known and celebrated game developers in the FPS genre, is at risk of losing his funding because Microsoft is having a rough year, then imagine what other developers are thinking. I’m not saying that they’ll avoid making deals with Microsoft or developing for Xbox consoles in the future, but it will definitely be on their mind.

I mentioned Sega earlier, and there is a reason for that. Though the reasons for Sega’s eventual collapse and exit from the console business are different – they gambled on baffling console add-ons like the 32x that just confused customers and made it harder rather than easier to make games for them – the outcome is largely the same. A lack of trust for the company from third-party developers creates a limited library. After the Sega Saturn sold poorly, no one wanted to jump in and make games for their follow-up, the Dreamcast. Even though the Dreamcast sold reasonably well, its library of games was too limited, which meant it never became a profitable venture. That is what ultimately forced Sega to exit the console market and focus on making games.

True, Sega and Microsoft are different companies, with Microsoft operating on a totally different scale. However, even their resources are not infinite. With their insistence on investing $80 billion in GenAI in the coming years, that money has to come from somewhere. A division like Xbox, that admittedly doesn’t make a profit off its main product, has already proven ripe for cuts and layoffs. How long they choose to stay in the console business at all, instead focusing on their role as publisher and developer, is going to depend on how much the rest of the gaming industry trusts them in the coming years.

If they can’t rebuild that trust, I wouldn’t be surprised if the next generation is the last one with an Xbox console in it.

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