Summer 2026 has been a period of unfortunate news in gaming, particularly surrounding Microsoft, Xbox, and their associated studios. After recent leadership changes in Xbox’s gaming division, Microsoft has begun to re-evaluate where it should allocate its resources, leaving many development teams on the chopping block for either mass layoffs or entire studio closures. Based on recent reports, some specific teams are at the highest risk, despite their illustrious history or current projects.
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After Xbox’s new CEO Ash Sharma took over following the departure of Phil Spencer, budget cuts and staff layoffs have been more and more frequent following restructuring throughout the company. This is part of a “reset” plan Xbox has been implementing since Sharma’s induction back in February 2026, with major cuts happening across the board. Looming restrictions and budget changes threaten to cancel several gaming projects, perhaps even cutting ties to studios that have been merged into Xbox’s umbrella for quite some time.
5. Compulsion Games (South of Midnight)
Compulsion Games is one of Xbox’s more recent acquisitions, and consists of developers behind the highly underrated title South of Midnight. The gorgeous stop motion and 3D art style of South of Midnight has helped the platforming action-adventure game gain a lot of praise, particularly for it authentically captures aspects of culture from the American South. The atmosphere of South of Midnight and its compelling story easily make it one of the biggest hidden gems on the Xbox platform, with Compulsion Games likely planning to use their stylistic approach on another title later.
South of Midnight is also a recipient of multiple awards, from a BAFTA for best new intellectual property to a Peabody award for excellence in storytelling. However, even though more than 100 people at Compulsion Games were responsible for South of Midnight, at least a dozen high-profile creators at the studio have left due to Xbox’s changes. Reports say that Compulsion Games could suffer even larger layoffs, greatly impacting the ability for the studio to work on another title, including a possible South of Midnight follow-up.
Xbox first acquired Compulsion Games back in 2018, where they grabbed a number of other studios at the same time. The significant layoffs planned at Xbox’s gaming divisions right now could see nearly half the staff released, putting close to 111 developers, artists, and other industry members at risk of losing their jobs. If numbers on LinkedIn are to be believed, that same 111 people who currently work at Compulsion Games could all be lost to wind if the studio closes from Xbox’s cuts.
4. Undead Labs (State of Decay)
Another possible victim of Microsoft’s shifting priorities is reportedly Undead Labs, the studio behind the State of Decay third-person survival horror series. Sporting a similar number of employees as Compulsion Games, Undead Labs has been a staple of Xbox’s exclusivity since the launch of the first State of Decay on Windows, the Xbox 360, and Xbox One consoles. Ever game in this franchise has been an Xbox exclusive of some kind, with one exception that makes Undead Labs’ potential shutdown even more confusing.
State of Decay 3 is actively revealed and in development right now, with even recent footage supporting the game’s upcoming 2027 release window. While this title is launching on Windows, the Xbox Series X|S, and PlayStation 5, the State of Decay franchise is likely still a series that keeps some players loyal to the Xbox console ecosystem. Previews of the game are becoming more frequent, despite the fact that Undead Labs could be closed or suffer huge layoffs before the game ever comes out.
The intricate management and survival systems of State of Decay 3 are promised to be the most ambitious in the series yet, but the layoffs might negatively affect the overall quality of the game. Games releasing in an unpolished state is nothing new, but far more preventable with a studio’s creative team intact to fix whatever issues come up. No matter whether Xbox sells Undead Labs or closes the studio altogether, any layoffs could have a ripple effect very quickly.
3. Double Fine (Psychonaughts/Kiln)
Double Fine is a legendary studio, so it was huge news when it was added to Xbox’s lineup of creative teams back in 2019. This studio is responsible for some of the greatest games of all time, including Psychonaughts, Grim Fandango Remastered, and Brütal Legend. At this time of writing, their planned 2026 title, Kiln, is still going strong, described as a multiplayer pottery brawler where players mold clay “Vessels” and participate in physics-based combat. This silly game has deep levels of customization, unique multiplayer modes, and a chaotic physics engine for wacky combat.
Unlike other studios on this list, Double Fine is unlikely to be closed due to its long history, but layoffs could cause the start of a multi-year decline. If Xbox chooses to slash Double Fine’s funding, both Kiln and other planned projects could be cancelled quickly. This may lead to long-time leaders at the company leaving, forcing downsized plans to keep afloat that might prevent the studio from ever recovering. Double Fine games are far different from what any other developers make in this day and age, so losing them would be a tragedy.
2. Ninja Theory (Senua’s Saga: Hellblade 2)
Out of the many studios threatened with Xbox’s layoffs and budget cuts, Ninja Theory may be the most vocal. The business reset of Microsoft hit Ninja Theory first, at least according to the Bloomberg reports that named the other development teams on this list. The developers of Hellblade: Senua’s Sacrifice, as well as other titles, the studio was largely independent until being bought by Microsoft back in 2018. Ninja Theory would go on to create Senua’s Saga: Hellblade 2, which became a selling point of the Xbox Series X|S.
Recently, Xbox’s changes have caused Ninja Theory to already cancel their 2026 game Project Mara, with their next title in the Hellblade series, Senua, also at risk. Reports state that Ninja Theory is one of the studios Xbox is looking to close entirely, prompting them to try and return to a state of independence they had prior to the Microsoft merger. Senua was revealed at the most recent Xbox Games Showcase only a month ago, so Microsoft immediately looking to inject layoffs or cut Ninja Theory away is probably the worst look possible for Xbox among cases with other studios.
Hopefully, Ninja Theory will be bought out by another group willing to help them complete Senua, but the sudden nature of this conflict has made everything difficult. The AAA style of Ninja Theory has always been impressive, even if not all of their games have gotten critical acclaim to the same level as Hellblade. The negotiations between Ninja Theory and Xbox indicates that Microsoft wants to part ways with the studio the most out of anyone in their umbrella right now, making this the most definitive situation on this list.
1. Arkane Studios (Dishonored/Blade)
The biggest discourse surrounding Xbox’s studio closures and layoffs involves Arkane Studios, the developers behind the Dishonored series and the highly anticipated Marvel’s Blade. The accolades for the Dishonored games are well-known, with its sequel and the sci-fi title Prey also endearing fans to Arkane’s signature style. However, Arkane Studios was owned by ZeniMax Media, a group that Microsoft bought in 2021. Around this time, the highly praised Deathloop was released by Arkane, only solidifying the developer’s potential to create fantastic experiences.
Yet, the first game Arkane made under Xbox was Redfall, a strange open world FPS meant to be an exclusive for the console. This game failed miserably, though less due to Arkane’s efforts and more from a strange live service approach many players attribute to Microsoft meddling. The commercial failure of Redfall may have caused Xbox to put Arkane in a dangerous position, despite their next project being one of 2027’s most anticipated games. Marvel’s Blade, first announced in 2023, was expected to have a late 2026 release, but was pushed back internally not too long ago.
Rumors have pointed to Marvel’s Blade possibly being cancelled too, but cancellations and layoffs might turn this into a reality. The scale of Arkane’s incoming layoffs are predicted to be the largest in Xbox’s history as well, with an astounding 1,000 creatives perhaps losing their positions at the company following their cuts. To many players, this is ridiculous, as Redfall‘s failure prompting this had likely little to do with Arkane’s creative teams. With Microsoft planning its biggest changes for July 2026, hopefully some studios will avoid the fate they fear most.
What development studio are you the most afraid of closing due to Xbox’s changes? Leave a comment below or join the conversation in the ComicBook Forum!
