Microsoft did the same thing just after it released Halo 2, in late 2004. That's when it cut its sports game studio, laying off nearly 80 people, then sold a Utah studio that had made snowboarding games to Take-Two Interactive.
Here's what Xbox boss Robbie Bach said that year, back when he was expecting the division to be profitable in fiscal 2007:
"When we got to that point, we started looking around and started realizing, wait, we've got tons of third-party support. We shouldn't be the bulk game provider."
Maybe this was all part of a plan that would unfold as the Xbox hit critical mass. Microsoft's a platform company, not a content company.
It's actually kind of odd to have game development in-house at a hardware manufacturer. The business world likes strategic alliances of associated but different businesses, and mergers of companies with similar products or services that can lower their costs by merging. An in-house studio is an expensive luxury. It worked for a while, though; Halo put the Xbox on the map.
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