Obsidian Reportedly in Talks to Avoid Closure as Xbox “Reset” Spreads

Avowed and The Outer Worlds developer Obsidian is reportedly among the Xbox-adjacent studios facing potential closure as Microsoft pushes ahead with a broader “reset” of its Xbox operations.

A report from The Game Business flagged Microsoft-owned Obsidian as currently in talks with Xbox leadership in an effort to avoid shutting down. The same list also included Undead Labs (State of Decay), Double Fine (Psychonauts), Ninja Theory (Hellblade), and Compulsion (South of Midnight). Separately, Arkane Lyon, the studio behind Marvel’s Blade, was also described as being at risk.

Rather than immediately closing these teams, Microsoft may instead pursue selling them as part of a process that could stretch over time. Even if studios end up spun off, layoffs may still follow. IGN reached out to Microsoft for clarification on the layoff claims, but no response had been provided at the time of writing.

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Obsidian does not currently have a newly announced project in the works after both Avowed and The Outer Worlds 2 reportedly missed commercial goals. There were earlier rumors that the studio might be working on another Avowed entry, though The Outer Worlds 3 was said to be off the table. On the brighter side, Grounded 2 landed as a 2025 release and performed well. Still, of the three games Obsidian released last year, it delivered its smallest—likely also its cheapest—development cycle by a noticeable margin.

Microsoft acquired Obsidian in 2018, alongside inXile, the Wasteland developer. Since then, the company has published The Outer Worlds 1 and 2, Grounded 1 and 2, Pentiment, and Avowed.

Xbox’s new leader, Asha Sharma, is reportedly accelerating work on additional The Elder Scrolls, Fallout, and Halo titles. Some players also speculated that Obsidian could be pulled into the effort to help build a new Fallout game—potentially even Fallout: New Vegas 2 or another installment in the franchise.

“I know everyone on the internet, on every game we ever announce, will constantly reference back to, ‘When’s the next New Vegas?’” Obsidian operations VP Marcus Morgan said last year, pointing to the studio’s beloved Fallout entry and noting that it has served as a key inspiration for the hit Amazon series’ second season setting.

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Sharma’s “reset” memo sent shockwaves through the industry, outlining that Microsoft’s gaming unit operates with a 3% accountability margin—apparently referring to profit margin. In the message, she said: “Excluding Activision Blizzard King, over the past five years, we have spent over $20 billion on ongoing investments in our content, platform, and hardware subsidy, but our annual revenue has declined nearly half a billion during that time. Going forward, this cannot continue.”

Jason Schreier warned that Xbox could face a “bloodbath.” At the same time, Microsoft is said to be reevaluating how much it backs externally developed games. The company reportedly removed funding for IO Interactive’s upcoming fantasy project that Xbox was expected to publish. Hideo Kojima’s Xbox horror game OD, however, was described as remaining unaffected for now.

Microsoft told Bloomberg it is “taking a fresh look at where we invest so we’re focusing on our highest priorities.”

Microsoft also stated: “We’re not reducing our overall investment in games. We expect to invest about the same in content as we did last year. What’s changing is where we’re investing and the kinds of projects we’re backing.”

The Information reported that Microsoft has not ruled out restructuring the Xbox brand into a fully owned subsidiary—an approach that could see Xbox run like a joint venture with other partners, or even potentially put on the market.

Unionized Xbox employees have pushed for immediate bargaining after the layoff reports surfaced. The group held a press conference to argue, “we’re done paying for executives’ failures.” A Microsoft spokesperson told IGN that the company will keep negotiating with the CWA in an effort to reach agreements covering Xbox.

“We respect the right of our team members to make their voices heard,” the spokesperson said. “We have a long track record of good faith partnership with labor organizations, as demonstrated by the several finalized bargaining agreements our teams have reached with the CWA and our labor principles. We are continuing to negotiate in good faith with the CWA to reach agreements across Xbox.”

Microsoft carried out a sweeping reduction of 9,000 staff in July 2025 as part of company-wide layoffs that also impacted gaming. The cuts included cancellations of multiple titles, such as Rare’s Everwild, and studio shutdowns including The Initiative, the developer behind Perfect Dark. With a year having passed, remaining Xbox staff are now bracing for the possibility of another repeat.

Wesley is Director, News at IGN. Find him on Twitter at @wyp100. You can reach Wesley at [email protected] or confidentially at [email protected].