Avowed and The Outer Worlds developer Obsidian is reportedly also at risk of closure amid Microsoft’s “reset” of the Xbox business.
The Game Business listed the Microsoft-owned studio, which developed the much-loved Fallout: New Vegas, alongside State of Decay developer Undead Labs, Psychonauts developer Double Fine, Hellblade developer Ninja Theory, and South of Midnight developer Compulsion as currently negotiating with Xbox leadership to avoid closure. Separately, Marvel’s Blade developer Arkane Lyon is also said to be under threat.
These studios may be sold rather than closed as part of a process that may take some time. And even if the studios are spun off, they may not avoid layoffs. IGN has asked Microsoft for comment about the layoffs reports, but it has yet to respond.
Obsidian is without a new announced project after both Avowed and The Outer Worlds 2 failed to hit commercial targets. There were rumors that the developer was making another Avowed game, but The Outer Worlds 3 was said to be not in development. On a more positive note, Grounded 2 — yet another 2025 launch — was a hit. But of the three games Obsidian released last year, it had the shortest (and almost certainly the cheapest) development period by far.
Microsoft bought Obsidian alongside Wasteland developer inXile back in 2018. Since then it has released The Outer Worlds 1 and 2, Grounded 1 and 2, Pentiment, and Avowed.
New Xbox boss Asha Sharma is reportedly speeding up development on new The Elder Scrolls, Fallout, and Halo games, and some had thought that Obsidian might have been drafted in to make a new Fallout game as part of that, either a Fallout: New Vegas 2 or something else 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’s VP of operations Marcus Morgan said last year, referencing the studio’s beloved Fallout game that’s served as the inspiration for the hit Amazon TV series’ second season setting.
How do you rank Obsidian’s games?
How do you rank Obsidian’s games?
Sharma sent shockwaves through the video game industry with her now infamous “reset” memo, in which she revealed that Microsoft’s gaming business has a 3% accountability margin (assumed to mean profit margin). “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.
Bloomberg’s Jason Schreier has warned of a “bloodbath” at Xbox. Meanwhile, Microsoft is reassessing its investment in externally developed games. It just pulled funding for IO Interactive’s upcoming fantasy project, which Xbox was set to publish. Hideo Kojima’s Xbox horror game OD, however, is safe from the chopping block.
Microsoft told Bloomberg it is “taking a fresh look at where we invest so we’re focusing on our highest priorities.”
“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,” Microsoft said.
The Information reported that Microsoft hadn’t ruled out turning the Xbox brand into a wholly-owned subsidiary in a move that could result in Xbox being operated as a joint venture with other partners or even potentially sold.
This week, 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.
Wesley is Director, News at IGN. Find him on Twitter at @wyp100. You can reach Wesley at [email protected] or confidentially at [email protected].
‘ The preceding article may include information circulated by third parties ’
‘ Some details of this article were extracted from the following source sea.ign.com ’
