NEW INC. MAGAZINE COLUMN FROM HOWARD TULLMAN

 

Microsoft’s Massive Xbox Downsizing Signals the Brutal Reality of the AI Revolution

We’re beginning to see the secondary and other follow-on impacts of AI.

EXPERT OPINION BY HOWARD TULLMAN, GENERAL MANAGING PARTNER, G2T3V AND CHICAGO HIGH TECH INVESTORS @TULLMAN

Jul 14, 2026

 

Sony’s PlayStation has been the global market leader for years, while Microsoft’s Xbox has been a distant second even after failed attempts by Microsoft to make its games a visible presence in the desktop world, where it clearly dominates the office installed base worldwide. Both Sony and Microsoft missed the migration of gamers to small mobile devices, where Nintendo prospered for a while—even before the phone revolution completely changed the video gaming space.

Now, we’re in the early innings of another sea change where the major tech players in the gaming industry are realizing that they no longer need armies of programmers, designers and developers to build and deliver the next generation of games. This is due to AI, of course, but also because the new games—mainly mobile—will be so lightweight and rapid as a result of the AI enhancements that there will be no need for any kind of bulky and costly game boxes or platform devices. Finally, as is the case across dozens of industries these days, the cost of the chips used in these boxes has been driven skyward by the adjacent and competitive demands of the AI companies for product that has cut into margins and may ultimately result in price increases at the worst possible time.

The latest salvo in this latest war of enforced attrition was last week’s announcement that Microsoft was making major changes in the Xbox video game business which entailed specifically cutting the Xbox workforce by 20 percent—about 1,600 employees now and another 1,200 plus over the next year. More importantly, the company is largely exiting the studio space, where it spent billions on expensive acquisitions not too many years ago.

The personnel growth in the MSFT games division was massive while the overall demand, player base and playtime all decreased substantially. It turns out—as with many other pre-phone and streaming activities—that millions of gamers would rather watch the play of truly talented players on YouTube than be second-rate participants in multiplayer competitions or simply play older games at home by themselves.

As far as the various studios are concerned, a few big ones like Activision Blizzard will shrink but remain, some others will simply be shut down, some are being encouraged to spin off and go off on their own with temporary support and assistance from Microsoft, and a few will remain until they too can be responsibly booted one way or another or quietly sold off to other buyers who right now seem to be few and far between.

But the most important takeaway from this highly visible and intentional effort at downsizing one lagging division to help offset enormous commitments and investments elsewhere in the enterprise—particularly in AI capabilities—is that we’re beginning to see the secondary and other follow-on impacts of the AI revolution. Thousands of Microsoft employees didn’t just lose their jobs because the AI tools could build new games, faster, cheaper and even more compelling than the former workers, they were also directly dismissed because the sales, marketing, manufacturing and promotion efforts of the entire video game division were shrinking and Xboxes were losing share and playtime as the gamers went elsewhere and the old boxes lost their sway and value.

This is only a single example, but I fully expect that we’re about to see many other industries rapidly roiled by similar advancements in process and speed or response time which will permit—in the name of speed, efficiency and massive cost savings, the wholesale elimination of entire groups and departments in businesses which will simply no longer be necessary because all of their functions in the value-creation chain will be substituted for with new AI-infused technologies. I’ll be writing shortly about a staggering combination in the advertising industry that brings together two powerful technologies and will completely upset and reorganize the ad creation business into a faster and cheaper system, which will also create more engaging and effective products.

It’s clear that a new form of M&A is already actively helping to connect and combine disparate companies with tools and services that are addressing common overarching problems in industries like advertising, and it’s also clear that these individual companies aren’t likely to build end-to-end systems by themselves in a timely fashion whether through lack of capacity or all the necessary resources or because they have been so deeply focused on solving their segment of the overall solution that they didn’t realize that a better and more robust and compelling solution could be offered by combining multiple offerings into a single comprehensive process.

 

NEW INC. MAGAZINE COLUMN FROM HOWARD TULLMAN

 

Beware the Coming Carnage in the Electric Vehicle Industry

Car buyers are no longer beating down dealers’ doors to get in line for the latest electric offerings, regardless of how smart the cars may be.

EXPERT OPINION BY HOWARD TULLMAN, GENERAL MANAGING PARTNER, G2T3V AND CHICAGO HIGH TECH INVESTORS @HOWARDTULLMAN1

Nov 18, 2025

 

If you ever doubted that the electric automobile industry was rapidly becoming a pedestrian and commoditized business of wrapping steel around smarts, where the software was everything of value and the shell was simply the latest look-alike clone, the signs couldn’t be any clearer than they are today. We are reaching the point where the carnage is about to hit every car manufacturer who is trying to make a go of it in electric vehicles (EVs).  The public is increasingly taking a pass. All the German manufacturers are backing away from their electric-only focus. Mercedes just reported almost a 20 percent year-over-year sales slump.

Buyers are simply no longer beating down dealers’ doors to get in line for the latest electric offerings, regardless of how smart the cars may be. Tesla’s recent profits fell almost 40 percent and, while they sold more cars in the third quarter year-over-year, they earned less money per car due to price cuts and low interest loans.  However, as I suggested many years ago, it’s likely when all the dust settles that Tesla will be the last U.S. player standing that’s making a real business out of EVs and also trying to hold off the Chinese onslaught, even without being able to sell the highly-profitable clean-air credits to all the other carmakers or the other prior government incentives. Mercedes, for example, is getting killed in China by BYD and Xiaomi, with sales off 27 percent in the third quarter.

The tariff problems are substantial for all the foreign automakers, but even if you put the current tariff issues aside for the moment and ignore the expiration of the EV credit that incented domestic sales for quite a while earlier this year, the fact that—according to the Kelley Blue Book—the average price of new cars has risen above $50,000 (driven largely by EVs and luxury models) has nothing to do with the realities that the vast majority of car dealers are seeing every day in their stores. This “real world” scenario is reminiscent of the fact that the continued surge in the stock market is a grossly misleading metric for what life is like for the average American at the grocery store, gas station, or local greasy spoon restaurant. Inflation continues to rise, prices at the pump keep jumping, and every shopper sees the truth regarding the sad shape of the economy despite Trump’s daily lies.

The real early warning signal for the car guys isn’t simply the slowdown in new EV sales, which have not been successfully altered by aggressive price cuts that are simply cutting into the dealers’ profits. It’s what you see in terms of the product sitting on the floors of the showrooms these days. They simply can’t sell anyone on the idea of buying a used EV. Upfront in the store, they may have positioned all the fanciest high-end versions of the 2025 and 2026 models, but if you step into the second or third tiers of demos and used cars, the asking prices for the 2023s and 2024s EVs are simply shocking. These are typically low mileage trade-ins that the dealers had to grudgingly take in to make a new sale—typically not an EV—and the prices look to be around half of what they were originally listed and sold for. Depreciation in luxury cars has always been a dramatic hit in the first year (right after the buyer drives the car off the lot), but these prices are absolute fire sales, and they still can’t move them.

The truth is that if you ask an honest dealer what’s going on, they will admit that the EVs are tough and costly to service; their unhappy owners are still plagued by the scarcity and wait times of charging stations—even though range anxiety is largely a fiction for folks driving six-figure vehicles to begin with—and the dealership owners hate taking these cars back in trades because they can’t do anything with them other than sending them to auction. The very last thing a Cadillac dealer wants to see sitting on his lot is a used Tesla. Dealers make a material portion of their overall income from the sales of pre-owned vehicles and there’s simply no buyer appetite right now for taking in or taking over someone else’s EV problems at any price.

But if anyone is going to come out of these dramatic dips in demand, it’s likely to be Tesla because Elon’s interest and business have always been about the software and the massive amounts of driver data that his systems were capturing. I’m sure he’s interested in selling plenty of cars (although he’s already more likely interested in selling them to fleet operators of trucks and robot taxis), but the long run view—typically tech-centric—is always the same, and that’s a winner-take-all game.

There’s never going to be a future for the majority of the manufacturers in the U.S. to try to build, maintain or enhance their own unique control and software systems. It’s just a matter of time before they begin to license Tesla’s tools and systems just as they’ve all been buying credits from Tesla for some time and since they’ve already begun to provide adapters for their vehicles to use Tesla charging stations. The ultimate value and the critical margins are in the software and the captured data which informs and strengthens the Tesla algorithms—not in the platform/shell that they’re housed in. At the same time, in a very new and rare twist, it appears that Tesla may be getting ready to license Apple’s CarPlay for its vehicles. 

Interestingly enough, in a completely different industry, we’re finally seeing a similar phenomenon where meeting the need and demand for increased access and expanding the reach of the “software” is far more important to all the parties than exclusivity, competitive considerations, or the platform on which the product is delivered and enjoyed. Microsoft is adopting this expansion strategy in the computer gaming industry, where it has bought two leading game studios in order to grow its multi-platform content offerings. But its most dramatic move has been the recent Halo announcement. Microsoft’s Xbox has been the exclusive home of the Halo video game for the last 25 years and Halo’s success has been responsible in part for the successive launches of four generations of updated Xbox consoles.

But Microsoft just announced that the 25th anniversary version of Halo will also be available for Sony’s PlayStation. Sony and Nintendo are Microsoft’s most important direct competitors in the game space. It’s clear that the new MSFT plan is to provide its games, software and other properties everywhere and make them available on all of the various platforms. Selling software, data and games is a lot more lucrative than building cars or consoles. These days, it’s not clear that it makes sense to manufacture anything.

In fact, following the many earlier examples in the mobile phone industry, where Facebook and others struggled and rapidly failed to introduce their own proprietary phone hardware, or the fitness field, where dozens of players entered and quickly exited the dedicated hardware device competition, I wouldn’t be surprised to see Microsoft step away entirely from its console hardware offerings and focus all of its attention on its desktop computers and its online offerings.

Since Microsoft Windows is installed on about 75 percent of all desktops worldwide, it’s a pretty short step to turn them all into mini-Xboxes as well. An early indication is the development of a new genre of video games that sits on your desktop just above the task bar (taking up only a fraction of your screen) so that you can keep one eye on the action and jump back and forth from work to wasting time in no time at all.

This takes multi-tasking to an entirely new level and is a significant step up from the old one-button fake spreadsheets we used to use to hide our screens from roving supervisors. But it’s also a reminder as well that—for too many of us—multi-tasking is simply another word for trying to do a lot of things all at once and doing each of them poorly. The critical key to success is to focus on being productive, not just being busy.