Rumors Swirl as Cuts at Xbox Put Undead Labs and State of Decay 3 at Risk
Undead Labs—the studio behind the upcoming Xbox-published zombie survival game State of Decay 3—may not survive long enough to see its own release. Growing chatter about another round of cuts at Xbox has put the studio itself in the spotlight, with shutdown rumors circulating ahead of the game’s planned launch.
The next entry from Undead Labs is shaping up to be one of Microsoft’s most notable upcoming releases from its internal teams. State of Decay 3 is scheduled for a 2027 release, and it will be the first fresh installment in the franchise in nearly ten years. State of Decay 2 launched in 2018, later receiving an updated edition in 2020. For the third chapter, State of Decay 3 is expected to bring a batch of new systems, including Plague Nests, refreshed combat and weapon mechanics, and the option to construct multiple settlements. Even with all that planned, the studio behind the project may face uncertainty before the game reaches its “final form.”
Studio head Philip Holt has also shared a revealing detail: Undead Labs released the announcement trailer for State of Decay 3 before the studio had even officially begun development.
Layoffs Coming at Microsoft, Undead Labs Potentially at Risk
Fresh reporting suggests a new set of layoffs could target several Xbox-affiliated studios, with Undead Labs among those potentially affected. A recent press call involving Communication Workers of America District 9 vice president Frank Arce indicated Microsoft could start another reduction in staff as early as early July. Alongside Undead Labs, other studios reportedly facing the possibility of cuts include Double Fine Productions, Compulsion, and Ninja Theory.
Arce’s remarks also imply that the studios potentially impacted could collectively involve more than 400 positions at risk, with additional expected losses at Blizzard and Bethesda. The layoffs have been described as potentially “the biggest single cut series” affecting the Xbox brand.
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If the rumored Xbox layoffs move forward, State of Decay 3 could feel the effects. A complete closure of Undead Labs would likely force the project to be handed to a different developer inside Microsoft’s gaming ecosystem, a change that could ripple through everything from development quality to the game’s release timing. State of Decay 3 has already spent years stuck in a long, drawn-out development cycle before its 2027 target, with the game first announced by Undead Labs in 2020 during the Xbox Games Showcase.
After the reveal, the first official gameplay trailer didn’t arrive until six years later, debuting at the 2026 Xbox Showcase.
These rumors aren’t the first time Microsoft has reduced headcount. Compulsion Games, the developer behind South of Midnight, was recently hit with a major layoff that reportedly affected roles across writing, art, and narrative and dialogue design. Microsoft also carried out a large round of layoffs during Summer 2025 across multiple studios, with early reporting suggesting as many as 9,000 employees were impacted.
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Layoffs are increasingly common across the wider industry as well, not only at Microsoft. Bungie said it will cut some employees after its final content drop for Destiny 2, explaining that it had not been consistently meeting the studio’s internal expectations in recent years. Epic Games likewise reduced its workforce by more than 1,000 employees in March 2026, including one of the more visible departures tied to the artist who originally created the mascot character Jonesy. With Microsoft’s latest rumored cuts, the concern is that another chapter of gaming’s most harmful workforce trend is continuing.
