Xbox Studios Facing Layoffs May Still Finish Their Games, Rumor Claims

Jordan Ellis04/07/2026Updated 12/07/20264 min read

Xbox Studios Facing Layoffs May Still Finish Their Games, Rumor Claims

Microsoft has confirmed the deepest restructuring in Xbox’s history, cutting 3,200 jobs from its gaming division and shedding four first-party studios — but insisting that not a single publicly announced game is being cancelled as a result. The announcement, delivered in a July 6 memo from Xbox chief executive Asha Sharma, hands Double Fine Productions and Compulsion Games back to independent ownership while Ninja Theory and Undead Labs are being sold to new, as-yet-unnamed owners.

The Xbox cuts sit inside a wider Microsoft reduction of 4,800 roles, roughly 2.1 percent of the company’s global workforce, disclosed the same day. Microsoft said Monday it is immediately eliminating 4,800 jobs, representing 2.1% of its workforce, and its Xbox division will lose about one-fifth of its staff, including 1,600 jobs on Monday and additional cuts in the coming months. Xbox will be cutting a total of 3,200 people, Xbox CEO Asha Sharma wrote in an email to division employees.

Double Fine and Compulsion Games Go Independent, Keep Their IP

According to Pure Xbox, which obtained the internal memo language, Compulsion Games (We Happy Few, South of Midnight) and Double Fine Productions (Psychonauts 2, Kiln) are transitioning to independent studios, while Ninja Theory (Hellblade) and Undead Labs (State of Decay 3) are being sold off, and Arkane Studios (Marvel’s Blade) is also reviewing strategic options. The memo itself spelled out the mechanics: “Compulsion Games and Double Fine Productions will return to management and transition to independent studios with their IP, catalog, and runway for their next games.”

Ninja Theory and Undead Labs are following a different route out the door. Per the same memo, “Ninja Theory and Undead Labs have entered terms to join new ownership with funding to complete and grow Senua and State of Decay 3.” That funding commitment is the detail keeping the two studios’ next projects, the Hellblade sequel and State of Decay 3, on track despite the change in ownership.

Arkane’s Lyon Studio Awaits a French Works Council Decision

A fifth studio remains in limbo. Arkane, the team behind the upcoming Marvel’s Blade, is subject to French labour law before any sale or closure can be finalised. “In France, Arkane’s management is beginning required consultation with its Works Council to review potential strategic options.” CNBC corroborated the studio’s precarious status independently, reporting that France-based Arkane Studios, which arrived at Microsoft through the $8.1 billion ZeniMax Media acquisition in 2021, is in touch with its works council regarding strategic options, Sharma wrote.

“None of Our First Party Publicly Announced Games… Are Being Cancelled”

The line drawing the most relief from Xbox fans came directly from Sharma’s memo, as reported by Push Square: “None of our first party publicly announced games or projects are being cancelled as part of these reductions.” Push Square noted that this means games such as State of Decay 3 and Blade remain in active development; there are agreements and funding in place to make sure they release.

That framing echoes an earlier round of industry chatter — a Windows Central video discussion, aired before the official confirmation, that speculated affected studios might be allowed to finish games already in motion rather than see them shelved outright. The July 6 memo effectively turned that speculation into contractual reality for at least two of the five studios named.

Microsoft Frames the Cuts as an AI-Era Cost Reset

Microsoft’s chief people officer tied the reductions to a broader company-wide shift rather than gaming alone. “The way technology is built, deployed, and used is transforming faster than at any point in my time here,” Amy Coleman, Microsoft’s chief people officer and a 27-year company veteran, wrote in a message to employees Monday. Analysts reading the Xbox-specific numbers were blunter about what the division’s economics now look like inside a trillion-dollar software company. DA Davidson’s Gil Luria told CNBC that “this is not a business Microsoft needs to be in, or should be in,” referring to Xbox, adding “it is very possible that they will spin it off at some point.”

Microsoft also pointed to an existing internal cushion for some staff. In April, Microsoft introduced a one-time voluntary retirement program, a first for the company, targeting U.S. employees at the senior director position and below, and more than one-third of eligible employees have accepted the offer. Coleman added that the company “will continue exploring similar approaches in the future,” while stressing that decisions of this scale are never made lightly.

For Australian and New Zealand Xbox owners, the practical fallout will play out through Game Pass. State of Decay 3 and the next Hellblade instalment were previously slated as first-party Xbox releases, and while Microsoft says funding is locked in to finish both, neither studio’s new owner has been named, leaving open questions about whether either game keeps its Game Pass day-one status once the sale closes. Local players who have leaned on Game Pass for access to Xbox exclusives will want to watch for confirmation of new ownership before assuming nothing changes at launch.