There is fresh concern for State of Decay 3 and its developer Undead Labs this morning, after reports overnight suggested both are under threat of closure as part of impending layoffs at Xbox.
Gamesbeat reported on work being done behind the scenes to find a buyer for Undead Labs, which is based in Seattle, Washington — a report that was backed up by Windows Central. If a buyer can't be found, the reports indicate, Microsoft may cancel State of Decay 3.
Undead Labs is one of a number of Microsoft-owned studios reportedly fighting to prevent a closure order. Psychonauts developer Double Fine, South of Midnight developer Compulsion, and Hellblade developer Ninja Theory are also said to be in talks with Microsoft over potentially buying themselves out. Hundreds of jobs are at risk either way, not just at these studios, but across Microsoft’s gaming business, which includes Bethesda and Activision Blizzard studios and publishing operations.
State of Decay 3, like Ninja Theory’s Senua, was at Microsoft’s Xbox Games Showcase earlier this month. According to Game File, Microsoft allegedly planned to close or spin off Ninja Theory when it revealed Senua at the showcase event, and it did so thinking that “the promise of a newly announced game would help draw investor interest in the studio.” Game File’s Stephen Totilo suggests Ninja Theory management may not have even been aware of Microsoft’s plan.
State of Decay 3’s Xbox Games Showcase announcement brought confirmation of a PlayStation 5 version and a release window in 2027, but there was no firm release window, disappointing some fans. This July marks six years since the third entry in the zombie survival franchise was announced, and while we are now seeing plenty of gameplay footage emerge from playtests (you can still put your name down to be added to the waiting list), State of Decay 3 will not be released this year. The latest reports, however, suggest it could never be released at all.
Concern for Xbox kicked off with Xbox CEO Asha Sharma’s “reset” memo, which most took as a signal that Microsoft planned big layoffs and studio closures. Microsoft published the memo just days after Xbox Games Showcase — which had gone down well with core Xbox fans. In it Sharma revealed that Microsoft's gaming business has a 3% accountability margin (assumed to mean profit margin), which is down year-on-year. "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," Sharma said.
One analyst told IGN "the studios most exposed are brilliant for prestige and rotten for the spreadsheet." Concern started to grow for the likes of Compulsion, Double Fine, and Ninja Theory, neither of which have seen significant commercial success in recent years.
Reports then emerged that Microsoft had started to take action. The Game Business revealed that Xbox Game Studios boss Craig Duncan had stepped down, and news of various Microsoft studios potentially closing down was not far behind. Bloomberg's Jason Schreier has warned of a “bloodbath” at Xbox. IGN has asked Microsoft for comment specifically on the studio closure reports but it is yet to respond.
Yesterday, unionized Xbox workers called for immediate bargaining following the layoff reports, hosting a press conference to say “we're done paying for executives' failures.” A Microsoft spokesperson told IGN it will continue to negotiate with the CWA to reach agreements across 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 cut an eye-watering 9,000 staff in July 2025 in a company-wide round of layoffs that also hit gaming. A number of titles were canceled as part of those cuts, including Rare’s Everwild, and studios shut down, such as Perfect Dark developer The Initiative. Staff who remain at Xbox are now bracing themselves for a potential repeat situation just a year later.
A recent report claimed Sharma is now speeding up development on new The Elder Scrolls, Fallout, and Halo games as she prepares to hit the reset button. Details on the potential shakeup come from The Information (via Reuters), whose sources indicated that Microsoft hadn't ruled out turning the Xbox brand into a wholly-owned subsidiary. It's said the move could result in Xbox being operated as a joint venture with other partners or even potentially sold.
Wesley is Director, News at IGN. Find him on Twitter at @wyp100. You can reach Wesley at [email protected] or confidentially at [email protected].
