The gaming industry is reeling from Microsoft’s latest strategic pivot. In what is being described as a massive “reset” for the brand, Xbox is cutting 3,200 jobs and parting ways with four of its renowned development studios.
Among the departures is Undead Labs, a studio that spent the last eight years under the Xbox umbrella without releasing a single game. Here is a breakdown of what went wrong, which studios are leaving, and what this means for the future of Xbox.
The Undead Labs Dilemma
Back in June 2018, Microsoft made waves by acquiring four studios in a bid to bolster its first-party lineup. Undead Labs, the team behind the popular zombie survival franchise State of Decay, was one of them.
However, the acquisition timeline paints a frustrating picture:
- The Last Release: State of Decay 2 was released just months before the studio was officially acquired.
- The Drought: Since joining Xbox Game Studios, Undead Labs has not shipped a single title.
- The Future: State of Decay 3 has been in development for years. Under the new restructuring, Undead Labs is being sold to an undisclosed buyer who will provide the funding to get the game across the finish line (now slated for a 2027 release).
Reports indicate that extensive internal dysfunction, high employee turnover, and a lack of clear design vision plagued the studio. But the blame does not fall solely on the developers—Xbox’s hands-off management style under Chief Content Officer Matt Booty has repeatedly come under fire over the years.
Who Else Is Leaving Xbox?
Undead Labs is not the only casualty of this massive corporate shift. Microsoft is divesting from three other major studios acquired during its aggressive expansion phase:
- Ninja Theory: The developers behind Senua’s Saga: Hellblade 2 are also being sold to a new, undisclosed owner to continue their work.
- Double Fine Productions: Led by Tim Schafer, the legendary studio behind Psychonauts 2 is returning to full independence and taking its IP with it.
- Compulsion Games: The team currently working on South of Midnight is also striking out on its own via a management buyout.
(Note: Arkane Lyon is also reportedly exploring “strategic options” that could lead to a sale or spin-off).
Why Is Microsoft Hitting the Reset Button?
Newly appointed Xbox CEO Asha Sharma has been blunt about the state of the division, stating in an internal memo that their business “is not healthy.”
Microsoft bet heavily on the Xbox Game Pass subscription model and aggressive multiplatform releases, but those bets have failed to offset the massive costs of acquisitions and game development. According to Sharma, the company was losing 64 cents on every dollar invested in certain content areas.
Instead of owning every independent studio, Xbox is now streamlining its operations, stripping away layers of middle management, and focusing its resources on its absolute biggest juggernauts: Call of Duty, Halo, Fallout, and The Elder Scrolls.
The Takeaway
While it is disappointing to see Microsoft’s ambitious first-party portfolio shrink, there is a silver lining. None of the four departing studios are being shut down. Instead of being completely dissolved and having their talent scattered, they are being given a chance to survive—either independently or under new ownership.
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