Undead Labs is an independent studio following a management buyout that closed after a planned sale fell through. Layoffs announced September 23, 2026, have forced changes to State of Decay 3, which is in alpha and remains in production for PC, PS5, and Xbox Series X|S.
Undead Labs spent the summer being moved around by Microsoft before ending up back in its own hands. On July 6, 2026, Microsoft laid off about 1,600 people in its Xbox division, part of 3,200 cuts planned through the fiscal year, and named Undead Labs among four studios set to leave the umbrella. A July 10 statement from Microsoft Gaming CEO Asha Sharma described the move as a "reset," with Undead Labs to be sold to a new owner and development funding promised for State of Decay 3. By October 9, no sale had completed. Studio head Philip Holt told The Game Business that a management buyout left the studio independent instead.
The layoffs hit anyway. On September 23, 2026, Undead Labs announced cuts, saying it had "said goodbye to many of our teammates." Holt tied the reductions to changes State of Decay 3 needs, though he said the game was already in alpha and did not require major scale-down. Production continues with Virtuos, Wushu, and Blind Squirrel as co-development partners, after full-scale work started around 2022 to 2023.
Before the restructuring, the studio showed the game in playable form at gamescom 2026. The Unreal Engine 5 open world is about four times the size of a single State of Decay 2 map, with up to three bases and 36 survivors running in parallel and Plague Nests that expand if ignored. A closed beta was set to start within the year, ahead of a 2027 launch on PC, PS5, and Xbox Series X|S with a day-one Game Pass release.
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Undead Labs has left the Xbox umbrella through a management buyout after a sale to a new owner did not go through. Studio head Philip Holt told The Game Business that layoffs announced on September 23 mean State of Decay 3 needs changes, but the game is already at the alpha stage and does not require a major scale-down. Virtuos, Wushu and Blind Squirrel are supporting co-development. Full-scale production began around 2022-2023.
Undead Labs announced layoffs on September 23, 2026, saying it had "said goodbye to many of our teammates." The studio, known for the State of Decay series, recently moved from under the Xbox umbrella to become an independent studio. The statement says State of Decay 3 production continues, and the game remains planned for PC, PS5, and Xbox Series X|S with a day-one Game Pass release.
Undead Labs showed State of Decay 3 in playable form at gamescom 2026. The open world, built with Unreal Engine 5, is about four times the size of a single State of Decay 2 map. Plague Nests expand if ignored, and up to three bases with 36 survivors can run in parallel. A closed beta starts within the year, ahead of a 2027 launch.
Microsoft Gaming CEO Asha Sharma announced a "reset" of the business, with 3,200 layoffs planned through the 2027 fiscal year, starting with 1,600 immediate cuts. Four studios-Compulsion Games, Double Fine Productions, Ninja Theory, and Undead Labs-will leave the Xbox umbrella. Compulsion and Double Fine will become independent with their IPs; Ninja Theory and Undead Labs will go to new owners. Arkane France is in consultation. The company aims to reduce management layers and appoint a COO.
On July 6, 2026, Microsoft laid off approximately 1,600 employees in its Xbox division, the largest workforce reduction in the division's history. The company plans to cut a total of 3,200 Xbox positions by the end of the current fiscal year. Xbox CEO Asha Sharma sent an internal memo describing the move as an "Xbox Reset," citing the division's profit margin being one-third to one-tenth of industry peers and slowed growth relative to rising costs. Four studios acquired by Microsoft in recent years will regain independence: Double Fine and Compulsion Games under their founders' leadership, and Ninja Theory and Undead Labs through sales. The memo stated that previously announced first-party games will not be canceled, and Microsoft agreed to provide development funding for Ninja Theory's "Senua" and Undead Labs' "State of Decay 3." Arkane Studios has begun labor-management consultations about its future. Employees across Bethesda Game Studios, ZeniMax Online Studios, and Obsidian Entertainment also reported layoffs, with some saying they received no prior warning. The reductions follow earlier Microsoft gaming layoffs of 1,900 in 2024 and over 6,000 in May 2025. The layoffs on July 6 represent half of the 3,200 planned; the remaining cuts are expected within the fiscal year.