Xbox Could Drop Undead Labs as Layoffs Threaten State of Decay 3
Undead Labs, the studio behind State of Decay 3, is reportedly among the Xbox-owned developers at risk as Microsoft prepares for “massive” layoffs. The plan, tied to upcoming organizational restructuring, could result in multiple studios being shut down or spun off from the company.
A report from Gamesbeat, later backed up by Windows Central, claims Xbox is actively trying to find a buyer for Undead Labs. If a sale can’t be arranged, State of Decay 3 may be cancelled and the studio could be closed.
Undead Labs isn’t the only one facing this uncertainty. Psychonauts developer Double Fine, South of Midnight developer Compulsion, and Hellblade developer Ninja Theory are also described as being in comparable situations—either needing to become independent or waiting to be purchased by another parent company under Xbox’s umbrella.
State of Decay 3 Could Be in Trouble
State of Decay 3 is scheduled to launch in 2027. Like a growing number of Xbox-owned releases, it’s also planned for PlayStation 5. With that in mind, it may seem reassuring that the game recently appeared during an Xbox Showcase, but there’s reason to doubt that public messaging guarantees Undead Labs’ future. Previously, Game File reported that Xbox highlighted Ninja Theory’s upcoming Senua as part of an effort to attract outside investors to the studio.
Put simply, what Xbox chooses to show publicly may not reflect what’s happening internally—especially as the company’s new chief executive, Asha Sharma, pushes major changes aimed at improving profitability.
In that context, the Senua reveal appears to have been less about long-term reassurance and more about generating investor interest.
Sharma sent an internal memo to Xbox employees only days after the Xbox Games Showcase, warning that the company needed a “reset.” In the message, she pointed out that, aside from Activision-Blizzard-King, Xbox had spent more than $20 billion over the previous five years on continuing investments across content, platform, and hardware subsidy—while annual revenue dropped by nearly half a billion over that same period. Her message emphasized that this situation “cannot continue” going forward.
Xbox’s recent struggles have been well documented. The Xbox Series X/S did not secure a major share of the market, and sales have fallen compared with prior years. Meanwhile, Xbox Game Studios poured resources into acquisitions, but only a small number of those newly acquired teams managed to deliver a breakout success. Even long-established names like Bethesda have reportedly fallen short of expectations.
On top of that, a scattered approach to bringing exclusives to PlayStation 5 has reportedly pushed away the brand’s most loyal audience. Without a new wave of major releases, it’s difficult to see how Xbox can recover the cultural relevance it had during the Xbox 360 era.
