Just weeks after showing off a polished new trailer at one of its biggest showcases of the year, Undead Labs finds itself fighting for survival.
The studio behind State of Decay 3, a game that has been quietly building real momentum among fans and influencers alike, is reportedly among several Xbox-owned developers at risk of closure, sale or significant layoffs as Microsoft works through what insiders are calling a sweeping companywide reset. The news, first reported by GamesBeat and corroborated by outlets including Windows Central and GamesHub, has stunned a fan base that just watched the studio’s biggest project get its moment in the spotlight.
The 4 studios caught in Xbox’s reset
According to the CWA trade union, which represents workers across several Xbox-owned studios, Undead Labs has joined a list of developers facing an uncertain future. In total, 4 studios appear to be at risk:
- Undead Labs, developer of State of Decay 3, where roughly 110 jobs could be lost if Xbox cannot find a buyer for the studio.
- Double Fine, the beloved studio behind Psychonauts, where approximately 100 positions are reportedly on the line.
- Compulsion Games, developer of South of Midnight, facing the potential loss of around 90 jobs.
- Ninja Theory, the studio behind Hellblade and the recently revealed Senua, with roughly 135 jobs reportedly at risk.
Combined, the 4 studios represent as many as 435 jobs that could be affected depending on how Microsoft proceeds in the coming weeks.
Why the timing feels especially cruel
What makes the Undead Labs situation particularly jarring is the contrast between public perception and what appears to be happening internally. State of Decay 3 had a strong showing at the 2026 Xbox Games Showcase, complete with a fresh trailer and hands-on previews that left several influencers impressed. Reporting on the game’s cooperative gameplay and base-building mechanics painted a picture of a survival title that genuinely understood what longtime fans of the franchise wanted.
That kind of visibility might normally signal a studio in good standing. But a prior case at Ninja Theory suggests otherwise. According to Game File, Xbox revealed Ninja Theory’s new project Senua specifically to attract outside investors to the studio, not as confirmation that the studio’s future was secure. In other words, a flashy showcase moment does not necessarily reflect the financial reality unfolding behind closed doors.
Microsoft’s deadline is approaching fast
Much of the uncertainty centers on timing. Xbox’s reset is reportedly expected to take shape around the close of Microsoft’s fiscal year, which falls on June 30, with formal earnings reporting scheduled for July 29. That window has fueled speculation that decisions about which studios survive, in some reduced form, sold off or shut down entirely, could come into focus within weeks.
If no buyer is found for Undead Labs, State of Decay 3 itself could be cancelled outright. The game, first announced back in 2020, has already spent years in development and is currently scheduled for release in 2027 on both Xbox and PlayStation 5 platforms.
A broader pattern of struggle at Xbox
The pressure facing these studios traces back to a blunt internal memo from Xbox’s new chief executive, Asha Sharma, sent just days after the showcase. In it, Sharma reportedly told employees that Xbox has spent more than $20 billion over the past 5 years on content, platform and hardware investments, excluding the Activision Blizzard King acquisition, while annual revenue declined by nearly half a billion dollars over that same period.
That financial strain has played out publicly in other ways too. The Xbox Series X and Series S consoles have struggled to capture significant market share, and several of Xbox’s major studio acquisitions have yet to produce the kind of breakout hits the company needed to justify the spending. A broader strategy of bringing former Xbox exclusives to PlayStation 5 has further complicated the brand’s identity among its most loyal players.
For now, the future of Undead Labs and State of Decay 3 remains genuinely uncertain, caught between a fan base eager to see the game succeed and a parent company under intense pressure to prove its enormous investments can still pay off.