Compulsion Games — the Montreal-based studio behind We Happy Few and last year’s underperforming South of Midnight — is one of two studios Sharma described as transitioning to independent operation. The studio keeps its intellectual property, its game catalog, and Microsoft is providing funding runway for its next projects. Compulsion had been openly looking for new work following Sharma’s early June “reset” memo, according to Kotaku reporting.

The framing matters here. Sharma did not say “we are closing Compulsion.” She wrote that the studio would “return to management and transition to independent studios with their IP, catalog, and runway for their next games.” That is the friendliest version of a divestment Microsoft could have offered. It also removes the studio’s cost structure from Microsoft’s books immediately while letting Compulsion take another swing without corporate overhead.

The Xbox Reset language around Compulsion has been carefully constructed to avoid the appearance of a firing. Practically, the studio now needs to find its own financing, its own publishing partner, and its own path to the next release without the Game Pass distribution channel Microsoft had provided since acquiring the studio in 2018. That is a meaningful downgrade in commercial infrastructure, even with the IP retained. Xbox is effectively saying: we don’t want to fund your next game, but we want you to have the tools to try elsewhere.

Double Fine — Tim Schafer’s beloved San Francisco studio behind Psychonauts 2, Broken Age, and the recent Keeper — has been under Xbox since Microsoft acquired the studio at E3 2019. The reset memo confirms Double Fine will follow the same path as Compulsion: transition back to independent operation with its IP, catalog, and funding runway. That means Psychonauts as a franchise, the Day of the Tentacle and Grim Fandango remasters, and Schafer’s creative direction all leave Xbox’s portfolio.

The commercial read is bleaker than the corporate framing suggests. Sharma wrote in her memo that Microsoft “expanded our studio system when we needed a pipeline of content to meet multiple strategies across subscription, streaming, and devices.” Double Fine was part of that pipeline. Losing it — even amicably — signals Microsoft is retreating from the vertical-integration model that defined Xbox from 2018 through 2024.

Schafer has not publicly commented as of publication. Double Fine’s Twitch stream, Devs Play, went on hiatus in June — a quiet signal that internal restructuring had been underway well before the public announcement.

Ninja Theory — the Cambridge-based studio behind Hellblade: Senua’s Sacrifice and Hellblade II: Senua’s Saga — is not transitioning to independence. It is being sold. Sharma’s memo confirmed that Ninja Theory has “entered terms to join new ownership with funding to complete and grow Senua.” The buyer has not been publicly disclosed as of July 9.

The Senua franchise is the crown jewel here. Hellblade II shipped in 2024 with critical praise but disappointing commercial performance, and reports throughout 2025 indicated Ninja Theory had been operating in a state of uncertainty. The reset memo confirms Xbox is providing bridge funding for the next Senua title, but the studio itself will not be a Microsoft-owned property when it ships.

The strategic implication is stark. Ninja Theory was one of the first-party AAA studios Microsoft had positioned to produce Game Pass content at scale. Losing it means Xbox’s owned-content roadmap gets thinner exactly at the moment Sharma is pledging to “fund flagship franchises more aggressively”. The two claims sit uneasily together.

What the Xbox Reset says with this divestment is quiet but clear: Microsoft is no longer willing to underwrite mid-tier AAA experiments. Hellblade II shipped with genuine critical acclaim, industry awards nominations, and technical achievements that pushed the state of facial motion capture forward. It did not sell. In the post-reset Microsoft, that combination of critical success and commercial disappointment is no longer a business the company will fund. The next Senua game exists because Ninja Theory found a buyer willing to take that bet, not because Xbox thinks it’s a bet worth taking.

Undead Labs — the Seattle-based studio behind the State of Decay series — is following Ninja Theory into new ownership. Sharma’s memo confirmed Microsoft is providing funding to complete State of Decay 3, which has been in development since 2019 and was showcased at multiple Xbox events without a firm release date. The studio itself becomes someone else’s asset once the game ships.

State of Decay 3’s fate through this transition is the concern that has dominated fan conversations since the memo dropped. DayOne reported that the game’s Game Pass status “could see” changes as part of the divestment. Microsoft has not confirmed whether State of Decay 3 will launch as a Game Pass day-one title. If it does not, that is a meaningful shift — the franchise built its audience specifically as a Game Pass anchor, and moving away from that model mid-development would represent a sharp reversal.

The larger read: Microsoft is cutting the studios that produced niche franchises with dedicated but small audiences, and keeping the studios that produce mass-market blockbusters. That includes King (Candy Crush), Blizzard (Diablo, Overwatch, World of Warcraft), Bethesda (Elder Scrolls, Fallout, Doom), and Activision (Call of Duty). Everything else is on the table.

The 1,600 immediate cuts on July 6 were not concentrated in the four spun-off studios. Sharma’s memo confirmed reductions across Activision, Bethesda/ZeniMax, Blizzard, King, Mojang, and Xbox Game Studios. Reports from Kotaku and Aftermath indicate the wider cuts hit King, Turn 10 Studios, Blizzard Entertainment, Sledgehammer Games, Halo Studios, and Compulsion Games (in addition to the studio’s exit).

Sharma emphasized in the memo that no publicly announced first-party games or projects are being cancelled as part of these reductions. That claim is doing a lot of work. It preserves the marketing runway for Gears of War: E-Day in 2026 and Clockwork Revolution in 2027, both of which Sharma explicitly reaffirmed as flagship titles Microsoft will fund through completion. But it does not commit to future projects, unannounced games, or the survival of specific development teams within larger studios.

On the platform side, Sharma wrote that Xbox platform teams are “40 percent larger than they were at the start of this generation, even as our player base and playtime have declined.” The response is aggressive management flattening — cutting 14 layers down to no more than 5, and where possible, 3. Vendor spending drops by 50 percent. Helen Chiang, the corporate vice president leading Minecraft, becomes Xbox’s first Chief Operating Officer.

Sharma confirmed in the reset memo that Xbox remains committed to the next-generation console codenamed Project Helix, targeting a 2027 holiday launch. That is roughly 18 months from now. What the console will look like — a traditional home console, a handheld like the Asus ROG Xbox Ally X, a Windows-hybrid device, or some combination — has not been disclosed.

The memory cost situation is the wild card. Sharma’s June memo confirmed component costs have quadrupled since fall 2025 and could exceed five times that baseline by the 2027 holiday season. Micron is pursuing five-year contracts that could keep memory prices elevated through 2030. Samsung, SK Hynix, and Micron control over 95 percent of DRAM production, and every wafer they allocate to High Bandwidth Memory for AI data centers is a wafer denied to consumer console silicon. The result: a next-gen Xbox at traditional prices is genuinely difficult to build.

Sharma has told Fortune that Xbox is “exploring new business models for hardware,” including expanded buy-now-pay-later financing. That is the language of a company preparing consumers for a $700 to $800 console — well above the $499 Xbox Series X launch price in 2020. It is also the language of a company that knows Sony faces the same memory pressures on the PlayStation 6 and cannot undercut Xbox by much.

The strategic question inside the Xbox Reset is whether Helix remains a single flagship device or splits into a family. The Asus ROG Xbox Ally X — the $1,000 handheld launched in partnership with Asus in late 2025 — has quietly become the template. It boots directly into a full-screen Xbox experience, reclaims roughly 2GB of RAM by disabling standard Windows overhead, and treats the Xbox library as the default rather than a store among many. Microsoft has not confirmed a Helix handheld variant, but the internal signals — from the memo’s language about “meeting players where they are” to Sharma’s Fortune interview emphasis on mobile and PC — suggest the next Xbox generation may be less a single box under the TV and more an operating layer that runs on multiple devices.

Microsoft’s original public target for Xbox Game Pass was 77 million subscribers by 2025. The Wall Street Journal reported the actual figure is roughly 30 million — less than 40 percent of that target. Microsoft has not publicly updated the number since February 2024, when it disclosed 34 million members. Growth has been flat or negative since.

The October 2025 Ultimate tier price increase — roughly 50 percent — accelerated the decline. Aftermath reported the hike raised prices by $10 a month, or $120 a year. Xbox Chief Strategy Officer Matthew Ball, who joined the company early in 2026, publicly acknowledged the price increase decreased subscriber count “by millions” over just a few months. That is a rare admission from a public-facing executive.

The Call of Duty Day One Game Pass release cost Xbox roughly $300 million in unrealized premium sales, per industry estimates cited by Aftermath. That single decision — moving Call of Duty into Game Pass rather than selling it at $70 per copy — is the largest single quantified failure of the Game Pass strategy.

Sharma explicitly cited the component cost crisis in her reset memo. Storage costs have quadrupled since fall 2025. Memory prices are projected to exceed five times that baseline by the 2027 holiday season. Micron, one of the three companies that control global DRAM supply, is pursuing five-year contracts that keep memory prices high through at least 2030.

The mechanic is the same one hitting Samsung’s Fold 8 Ultra and Apple’s iPhone lineup. Samsung, SK Hynix, and Micron have redirected wafer capacity toward High Bandwidth Memory for AI data centers. Producing 1GB of HBM consumes roughly three times the wafer capacity of standard LPDDR5X used in phones and consoles. Every Nvidia GPU shipped is a wafer denied to consumer hardware.

The critical difference for Xbox: consoles have historically operated on razor-thin hardware margins, sometimes sold at a loss to drive software and subscription attach rates. That model breaks when memory costs quadruple. Sony faces the same problem on the PS6. Both companies are now openly discussing what a “premium console” pricing tier looks like — which is corporate-speak for consoles that cost more than $500.