Microsoft-owned studio Undead Labs, known for the State of Decay series, faces possible closure as part of Xbox’s major restructuring efforts underway after June 30, 2026, the end of Microsoft’s fiscal quarter [1, 2, 3, 4, 5, 6, 7, 8]. The studio currently employs about 110 people, and it is in the middle of developing State of Decay 3, which remains scheduled for release in 2027, though that timeline is uncertain if the studio shuts down [1, 2, 3, 4, 7].

Xbox CEO Asha Sharma is leading what she calls a "reset" to make Xbox profitable. This includes layoffs and potential closures not just at Undead Labs, but also at other Microsoft-owned studios like Double Fine, Compulsion, and Ninja Theory. Each faces large job cuts: Double Fine around 100; Compulsion 90; Ninja Theory 135; totaling roughly 435 jobs at risk across these four studios [1, 2, 4, 5, 8].

The layoffs and possible closures are expected to start the week of July 6, 2026 [2, 5, 8], immediately following the end of the fiscal quarter on June 30 [1, 2, 5, 8]. Early reports show some initial layoffs already occurring at Compulsion in early July [1].

Industry voices warn this could be the largest single layoff event in gaming history. Developer George Broussard called it "likely the largest single layoff event in gaming history" and predicted Xbox will become extremely unpopular for a long period [2]. Undead Labs boss Jeff Strain criticized the industry's management, saying, "the giants of this industry have shown us this week that we cannot trust them to moderate and manage the wealth and power that players and fans have given them" [6]. Worker advocates like the Communications Workers of America union stated, "those workers will not be traded as disposable" [1].

There is some speculation the studios might avoid closure if buyers are found willing to acquire them, possibly allowing them to regain independence from Microsoft [1, 2, 3, 7]. However, no public confirmation of any plan by Microsoft has been made as of early August 2026 [1, 4].

Despite the turmoil, State of Decay 3 development appears ongoing with gameplay footage released in mid-2026 [1, 3]. The coming weeks will clarify the fate of these studios and their staff as layoffs continue and Microsoft finalizes its restructuring.