Undead Labs Completes Its Xbox Separation and Cuts Staff the Same Day
The studio made two announcements a few hours apart. The first, on its official State of Decay site, was upbeat. The studio "has completed its separation from XBOX and is now operating as an independent, employee-owned game development studio," and said State of Decay 3 development "remains actively underway." That statement doesn't mention layoffs.
The second came later on the studio's LinkedIn page. Push Square reported that on the same day another wave of Xbox layoffs was confirmed, the team shared that it had undergone "significant" job losses itself. The post read: "Unfortunately, today we are also saying goodbye to a significant number of our colleagues. It's difficult to reach this moment knowing that not everyone who helped get us here gets to make the rest of the journey with us." PC Gamer and Push Square both reported the post on their own, so the layoffs are confirmed. The only unknown is their size.
The LinkedIn post also described the people leaving as developers who had spent years on the State of Decay series. It said their work remains part of the studio and part of State of Decay 3. It asked hiring managers to contact the studio directly if they wanted to speak with departing staff, which is a common step when a studio can't keep people but wants to help them find new jobs. The post gave no percentage of staff affected, no list of departments, and no severance details. Anything beyond "significant" would be a guess.
Studio head Philip Holt's statement focused on independence. "Independence brings us closer to our community and lets us focus on what matters most: making the best games we can and earning the continued support of the people who choose to spend their time with us," he said. He also thanked Microsoft, saying the company "has been part of the State of Decay story from the very beginning."
Matt Booty's 268-Role Xbox Memo Is a Separate Count
The confusion comes from a second announcement that went out the same day. Xbox Game Studios head Matt Booty sent a staff memo, published on Xbox Wire as "Continuing Our Reset." It announced the elimination of 268 roles "across Halo Studios, other first-party studios, and the XGS management and central functions layer." In the same memo, Booty confirmed Undead Labs' transition had been completed.
The memo doesn't list Undead Labs among the areas covered by the 268 figure. That makes sense: by the time the memo went out, Undead Labs was no longer a first-party studio. Readers should keep the two numbers apart. The 268 roles are Microsoft's cuts. Undead Labs' layoffs are a separate, undisclosed number announced by what is now an independent company. Adding them together, or assuming one includes the other, isn't supported by either statement.
The reported Xbox figure also differs between sources. Pure Xbox's headline on the memo story said 286 jobs, and the same number appears in its follow-up on Undead Labs. The published Xbox memo says 268. GosuGamers also reports the second wave as a further 268 staff being laid off alongside several changes to the company's studio structure. 268 is the correct number, and it applies only to Microsoft's own cuts.
Booty said the actions taken since July, "inclusive of the studio divestitures," bring Xbox "roughly three-quarters of the way through previously announced restructuring." In other words, Microsoft counts spinning off studios like Undead Labs as part of the reduction, even though those studio staff aren't among the 268 announced on September 22.
How the Undead Labs Divestiture Fits Microsoft's Xbox Reset
Undead Labs' exit wasn't a surprise. In July, Xbox announced plans to lay off thousands of employees and to spin off some of its game studios, letting them go indie. Undead Labs was one of those studios. Microsoft's July 6 "Resetting Xbox" post said Undead Labs and Ninja Theory had agreed terms to join new ownership, with funding to finish and grow State of Decay 3. GosuGamers puts the first wave at 3,200 employees cut by the Microsoft division.
Booty's memo says what the spun-off studios received. In August, Compulsion Games and Double Fine "returned to management with their IP, back catalogs, and runway funding," and Undead Labs "has now successfully transitioned on similar terms." Read directly, that suggests Undead Labs left with ownership of the State of Decay franchise and some operating money. The memo only says "similar terms," though. It doesn't specify Undead Labs' funding, ownership percentages, or the legal structure of the employee-owned company. The studio said more about its plans "will be shared at a later date."
Undead Labs did better than one of the other studios in the same process. Booty wrote that "two separate agreements for Ninja Theory fell through," and that Xbox will now consult employees on a proposed closure "while continuing to explore other paths forward." Consultation with Arkane is expected to run through the end of the year. Some coverage has gone further than that: GosuGamers wrote that Ninja Theory "was shut down," but Microsoft's memo describes a proposed closure under consultation, not a completed one.
The memo also moves several studios within Microsoft. Activision takes on World's Edge and Rare and will build the next Halo game with a new team. Bethesda absorbs Obsidian. King takes over Microsoft Casual Games. Playground and Turn 10 merge into one studio covering Forza and Fable. The overall direction is fewer business units inside Microsoft and a few studios pushed out.
The studio's history with Microsoft adds context. Undead Labs' own announcement says the original State of Decay launched in partnership with Microsoft in 2013, and Microsoft acquired the studio in 2018. That first game was developed by Undead Labs and published by Microsoft Studios, and it shipped on Xbox 360 and later on Windows. Microsoft was the series' publisher for more than a decade. Undead Labs now has to find that support elsewhere.
State of Decay 3 Keeps Its Game Pass Day-One Launch Under a New Publisher
Players will want to know what happens to the game. According to Undead Labs, State of Decay 3 is in alpha. The team is still working toward the closed beta it had already announced for before the end of 2026, and the game "remains targeted for release in 2027 on XBOX, Game Pass, PC, and PlayStation."
Microsoft's memo makes the Game Pass commitment explicit. Xbox's announcement says "Undead Labs has now successfully transitioned on similar terms and, with a new publisher, will release State of Decay 3 day one on Game Pass." Neither company has named the new publisher. That matters because the publisher will control marketing, certification, and platform launches from here, and Microsoft no longer will.
Xbox's June 7 gameplay reveal gave the fullest platform list: Xbox Series X|S, Xbox on PC, cloud, Game Pass, Steam, and PlayStation 5. Undead Labs' September statement is shorter ("XBOX, Game Pass, PC, and PlayStation"). It doesn't withdraw any platform, but Steam and cloud aren't listed separately. For PC players, Game Pass on PC and a Steam release were both part of the plan as recently as June, and nothing since has cancelled either.
The playtest program is still running. An Xbox Wire post on August 26 said closed-beta tests were planned before the end of 2026, following alpha signups that opened in April 2026. Undead Labs is still sending players to its playtest signup page on StateofDecay.com.
The game has been in development a long time. PC Gamer notes that before the Microsoft mass layoffs little had been heard about the survival game since the 2020 reveal trailer, and that the game only existed in a Word document when that trailer was released. After six years, the studio is now finishing the game with fewer people and no Microsoft ownership. Neither company has said whether the layoffs affect the 2027 target or the scope of the game. Both kept the same milestones on the day the cuts were announced.
What This Means for Game Pass Subscribers and PC Players
If you're waiting for State of Decay 3, you don't need to do anything, and nothing in the September 22 announcements changes when or where you can play it. The Game Pass day-one commitment comes from Microsoft and the 2027 PC and console target comes from the studio, and both were restated after the separation. The real uncertainty is how a smaller, independent team handles the rest of development. The closed beta before the end of 2026 will be the first public sign of how that's going.
- Undead Labs completed its separation from Xbox on September 22, 2026, and is now an independent, employee-owned studio.
- The studio confirmed on LinkedIn that it laid off "a significant number" of colleagues the same day, and it has not given a headcount or percentage.
- Microsoft's separate cut of 268 roles covers Halo Studios, other first-party studios, and Xbox Game Studios management, and Undead Labs isn't named in that figure. Reports of 286 jobs are wrong.
- State of Decay 3 is in alpha, with a closed beta planned before the end of 2026 and a 2027 release targeted on Xbox, Game Pass, PC, and PlayStation.
- Microsoft says a new, unnamed publisher will release the game day one on Game Pass, and the June reveal also listed Steam, Xbox on PC, cloud, and PlayStation 5.
- Players who want to test the game can still sign up through StateofDecay.com's playtest program.
Undead Labs got the kind of exit Ninja Theory couldn't secure: according to Microsoft, it left on terms similar to Compulsion and Double Fine, and its main game still has a guaranteed Game Pass launch. It also paid for that in jobs, on the same day, in numbers it hasn't disclosed. Microsoft's next scheduled step is its October 6 all-Xbox town hall. For Undead Labs, the next public milestones are naming its new publisher and running the closed beta before the end of the year, which will show what the smaller studio can deliver.