State of Decay 3 Faces Layoff Fears as Xbox Reshuffles Teams and Priorities

Fresh worries are swirling around State of Decay 3 and its studio Undead Labs, following overnight reports that both could be caught up in an upcoming round of layoffs at Xbox and possibly face shutdown decisions. The concern comes as Microsoft continues to reshape its gaming leadership and financial priorities, leaving multiple teams bracing for what comes next.

What the latest closure talk says

1. Reports circulated overnight claiming that Undead Labs, based in Seattle, Washington, may be at risk as part of Xbox’s broader restructuring plans.
2. Work behind the scenes is reportedly underway to locate a buyer for the studio; the effort was said to have support from additional coverage, reinforcing the idea that Microsoft would consider selling rather than fully closing.
3. If a suitable buyer cannot be found, the reports indicate Microsoft might cancel State of Decay 3.

Undead Labs is not the only Microsoft-owned studio reportedly trying to avoid a closure outcome. Multiple teams are said to be in conversations with Microsoft about purchasing themselves out or otherwise securing their future, including Double Fine (the studio behind Psychonauts), Compulsion (developer of South of Midnight), and Ninja Theory (developer of Hellblade). The potential fallout is framed as broader than a few studios—hundreds of positions may be at risk across Microsoft’s gaming operations, including the company’s Bethesda and Activision Blizzard properties and its publishing activities.

Timeline: Xbox Showcase moment and why fans questioned the plan

1. State of Decay 3 was highlighted earlier this month during Microsoft’s Xbox Games Showcase, alongside Ninja Theory’s Senua presentation.

2. A report later alleged that Microsoft intended to close or spin off Ninja Theory after revealing Senua at that showcase, with the reasoning that announcing a new game could help generate investor interest in the studio.

3. The same report suggested Ninja Theory leadership might not have been fully aware of Microsoft’s internal plans.

For players, the showcase reveal did bring some concrete details: confirmation of a PlayStation 5 version for State of Decay 3, plus a release target sometime in 2027. However, a truly fixed window wasn’t provided, which frustrated some fans. This July also marks six years since the third entry in the zombie survival franchise was originally announced. While playtest footage has been trickling out as testing continues—and players can still sign up for a waiting list—new reporting claims the game might not ship at all.

Why the anxiety ramped up across Xbox

The unease gained momentum after Xbox CEO Asha Sharma issued a “reset” memo, which many interpreted as a strong signal that Microsoft planned major layoffs and potential studio closures. The memo was released just days after the Xbox Games Showcase, an event that had generally landed well with long-time Xbox fans.

In the memo, Sharma pointed to financial pressure inside the gaming division. She referenced a 3% accountability margin—described as a likely profit-margin proxy—stating that it has fallen compared to the year prior. Sharma also said that, excluding Activision Blizzard King, Microsoft had spent more than $20 billion over the previous five years on ongoing investments across content, platform, and hardware subsidies, while annual revenue declined by nearly half a billion dollars during that period. She concluded that this situation “cannot continue,” according to the memo’s wording as shared in coverage.

One analyst summarized the situation bluntly, saying that studios could be “brilliant for prestige” while still “rotten for the spreadsheet.” That framing helped explain why attention turned toward teams such as Compulsion, Double Fine, and Ninja Theory—studios that, in recent years, have not shown the level of commercial performance that management typically expects from large spenders.

Background: Studios, layoffs, and public pressure

After the memo, additional reports suggested Microsoft had begun taking action. Coverage noted that Craig Duncan, head of Xbox Game Studios, had stepped down, and follow-up stories quickly expanded into claims that multiple Microsoft studios could be shuttered. Bloomberg’s Jason Schreier also warned about a “bloodbath” across Xbox. Meanwhile, IGN reportedly reached out to Microsoft for comment specifically on the studio-closure claims, but the company had not responded at the time of publication.

As the news spread, unionized Xbox workers reportedly pushed for immediate bargaining following the layoff rumors. They held a press conference to argue that “we’re done paying for executives’ failures.” In response, a Microsoft spokesperson told IGN the company would continue negotiations with the CWA in an effort to reach agreements across Xbox.

The spokesperson said: “We respect the right of our team members to make their voices heard. 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.”

Why players are especially worried right now

Microsoft previously carried out a major round of cuts in July 2025, removing 9,000 employees in a company-wide layoff that also hit gaming. The shakeup reportedly led to cancellations of multiple projects, including Rare’s Everwild, and it also included studio closures such as The Initiative, which was developing Perfect Dark. With another reset reportedly looming a year later, remaining Xbox staff are said to be bracing for the possibility of a repeat scenario.

Adding to the uncertainty, a separate report claimed Sharma is now accelerating development on new installments tied to major franchises such as The Elder Scrolls, Fallout, and Halo as part of the broader “reset” approach. The Information, via Reuters, cited sources suggesting Microsoft has not ruled out restructuring the Xbox brand into a fully owned subsidiary. That change, the reporting said, could potentially lead to Xbox being run as a joint venture with outside partners—or even sold.