Undead Labs leaves Xbox and becomes an employee-owned studio — at the cost of significant layoffs

The studio Undead Labs, creator of the State of Decay series, has completed its separation from Xbox and declared itself an independent, employee-owned company. In the same LinkedIn post, the studio acknowledged that it is laying off a "significant number" of workers — among them people who were making State of Decay 3.

Undead Labs did not give an exact figure for the layoffs. The studio stressed that the laid-off developers had carried the franchise for years and that their work will remain part of State of Decay 3 regardless of where those people continue their careers.

"It's hard to reach this moment knowing that not everyone who helped us get here will walk the rest of the way with us… There have been far too many announcements like this in the industry, and we hate adding to that list. These are people we would hire again without a second thought, and we hope the industry takes notice of them," the studio's statement reads.

According to Microsoft, Undead Labs regained its independence on terms similar to those under which Double Fine and Compulsion split from Xbox earlier this year: with the rights to the IP, the catalog of released games, and funding for the initial period. The studio will now look for a publisher for State of Decay 3 externally, while the game is still announced with a day-one release on Xbox Game Pass.

What changes for the studio

For the team this is a trade-off: the studio gains control over its own intellectual property and the right to decide for itself what the project will be, but loses the corporate cushion of a guaranteed budget from a major publisher. That is most likely what the layoffs are tied to — the headcount has to be brought in line with the scale of funding the studio can sustain on its own, rather than with the scale of an internal Microsoft division.

The practical consequences are immediately visible on several fronts. Production of State of Decay 3 will apparently have to be rebuilt on the fly: some specialists are leaving a project that is already in development, and publishing functions — marketing, porting, certification, localization — will have to be handed over to a new partner. For the developers caught in the layoffs, this means entering a job market where there have been far too many such announcements in recent years. For those who stayed, the very nature of the work changes: in an independent studio there are fewer layers of approval, but also less of a safety net.

The news came shortly after another wave of layoffs in Microsoft's gaming division — the company cut a further 268 people, hitting Halo Studios hardest. According to affected employees on social media, the layoffs also touched Rare, Treyarch, World's Edge, Activision and The Coalition.

Why Xbox is parting with its own studios

The Undead Labs separation is already the third similar case in a year, and that changes how the event is read. A one-off studio sale looks like an isolated decision; three in a row following the same pattern — handing over the IP along with money for the initial period — look like a well-practiced mechanism for parting ways. Microsoft, which has assembled one of the industry's largest studio portfolios in recent years, is now narrowing that portfolio, keeping the projects that are larger and probably more predictable in terms of return on investment.

For mid-sized teams with a recognizable but niche franchise this is a signal: a place inside a large holding company has stopped being a guarantee of stability. The "let them go with the rights and the money" arrangement is nonetheless gentler than simple closure — the studio keeps a chance at continuing, albeit with a reduced staff. If the trend continues, a noticeable layer of formally independent mid-sized studios in need of an external publisher may emerge on the market — and that will likely boost demand for publishing services.

State of Decay 3 itself will be the test of the model. The game retains its Game Pass launch, meaning the connection with Xbox is not severed entirely but turns from subordination into partnership. Whether a smaller team can carry to release a project that was planned with Microsoft's budget and resources is the main question facing this separation model.

Community reaction

Reaction to Undead Labs leaving Xbox and moving into employee ownership is split, but the tone is more skeptical than indignant. Under posts by industry writers, the most common comment is that the studio has been making State of Decay 3 for too long: the game was announced back in 2020 and is still in an early stage. Many call the layoffs inevitable — without Microsoft's money, in their view, the studio cannot sustain its previous headcount and is forced to cut costs to avoid going bankrupt. Some commenters link the layoffs directly to the fact that former internal studios no longer have unlimited funding.

"Eight damn years, and the game is still in an early stage… incredible."

— @DrudikTomas (X)

"In other words: the free money that covered a bloated headcount and excesses is no longer coming in. They have to shrink to the bare minimum, otherwise the studio won't survive."

— @AsTheNewsBurns (X)

"Of all of yesterday's news, only the Undead Labs story upset me from the very start. I understand the studio hasn't released a new game in a long time, but ever since the first State of Decay they were the face of Xbox."

— @Pebbas2 (X)

What lies behind an exit from Xbox like this: a management failure, State of Decay 3 development being too expensive, the general downturn in the industry?