Xbox Studio Shutdown Fears Grow Amid Blade Uncertainty

Concern over the future of Xbox’s first-party studios is growing amid fresh allegations of impending layoffs, studio closures, and project cancellations across Microsoft’s gaming division. Industry sources and recent reports indicate that at least five studios could be affected as the business re-evaluates its gaming budget.

The issue has reignited criticism of Xbox's acquisition approach. Microsoft has been buying studios since 2018, adding big-name publishers and developers to its portfolio. However, critics say Xbox is still too reliant on its traditional first-party games, Halo, Gears of War, and Forza.

Forza Motorsport appears to be slowing down, and Forza Horizon is still going strong.

Halo continues to grapple with doubts about its long-term future, while Xbox Game Studios returns with Gears of War: E-Day, though some fans fear the franchise is no longer the cultural phenomenon it once was during the Xbox 360 era.

The bigger problem is that after years of acquisitions and billions invested, Xbox still hasn't figured out how to consistently produce a new generation of blockbuster exclusives. New Fallout or The Elder Scrolls titles could still be years away, and Activision-owned titles are most likely to remain available outside the Xbox ecosystem.

With that uncertainty, focus has turned to the studios that might be most immediately imperiled. Undead Labs is one of the studios that might be liquidated or sold, according to a report. The report also cites Double Fine Productions, Compulsion Games, and Ninja Theory as teams that could be affected.

If those closures go forward, the four combined would put about 435 jobs at risk. Undead Labs’ addition has received particular attention, given that the firm has become much more public about State of Decay 3 in recent months. After years of silence, the dev showed off fresh gameplay, gave interviews, and released more footage focused on aspects like base building.

Some analysts now suspect the unique marketing drive was designed to show that investors and the public were excited about the project.

Many see Undead Labs as having the best shot of being bought or remaining within Xbox compared to the other studios apparently under consideration. State of Decay is one of Xbox's most organic success stories, say supporters of the studio. The original game was a notable smash during the Xbox Live Arcade era, and the franchise has slowly grown in popularity over time.

There is, however, grounds for alarm. Undead Labs has said earlier that when State of Decay 3 was announced, the project was “nearly non-existent outside of a concept document.” Looking back, the early announcement seems strangely premature, as the team was apparently under five members at the time.

The studio also suffered from years of development problems and worker attrition. But the recent gameplay demos have prompted some fans to feel the project has finally steadied itself and is starting to come together. Fans of the game say Xbox should let the game be finished, not spin off or shut down the company. They mention the franchise’s co-op zombie gameplay, community, and possible interest to fans of games like Days Gone and Left 4 Dead.

They also highlight that Undead Labs continued to pump out major updates for State of Decay 2 while working on the sequel, helping maintain a healthy player base rather than leaving the existing community behind. Among the studios apparently under investigation, many experts say State of Decay 3 has the clearest commercial promise. The most concerning report might be on Arkane Studios and its upcoming Marvel's Blade.

Microsoft is considering canceling Blade, according to the report, as part of a broader cost-cutting effort.

The article says sources have told them the game was initially aiming for an earlier release, but its schedule has slipped to late 2027, and the project has gone over budget, according to the report. Microsoft is also reportedly considering selling Arkane rather than shutting it down.

It's particularly bad news for those who have seen a recent renewed buzz around Blade. Many players, bored by superhero fatigue, still consider the vampire hunter a character who can carry a distinctive action game. A cancellation would only increase the fears about what Arkane's status as one of the industry’s leading immersive-sim creators would imply for the genre.

Industry analysts say licensed Marvel games sometimes face extremely steep financial hurdles. Revenue will have to be split between Disney and Marvel; the platform holders will take their share, and engine royalties may also be in play. A multiplatform release can make profitability calculations extremely tricky.

So, Blade probably had to sell a lot more than your usual first-party Xbox game to make its budget worth it. Arkane was also never in the best position inside the larger Bethesda corporation, critics have argued. Some have long noted the company is better suited to produce a smaller Elder Scrolls spin-off focused on the Dark Brotherhood, capitalizing on a proven series while letting Arkane continue to make the sort of games it is renowned for.

Others are wondering why the company didn’t go with Deathloop 2, since Deathloop was well-reviewed and supposedly played by millions of people. Whatever the cause, the fact that Marvel's Blade could be axed before it even hits shelves has become one of the biggest stories surrounding Xbox's ongoing restructure.

According to the report, layoffs are scheduled to start in early July and could impact most areas of Xbox. There are rumors that the total number of jobs lost could exceed 1,000 and that the studio closures are only part of the larger picture. That has raised concerns that even very productive teams may not be safe. Analysts have identified studios such as Obsidian Entertainment as prospective targets for reorganization, despite their output of several games in recent years.

But the impact is no longer limited to just Microsoft-owned developers. External partners who have relied on Xbox funding are also starting to feel the pinch. One example is IO Interactive, which confirmed that its collaboration with Xbox on Project Fantasy has ended. The studio claimed it’s still committed to the fantasy RPG but admitted that the loss of outside funding has had “short-term consequences, including staffing decisions.”

Bloomberg later reported that Xbox had indeed backed out of the project as part of a broader reconsideration of investment priorities, bolstering the idea that Microsoft is focusing resources on fewer, higher-priority titles.