Obsidian Entertainment, the studio behind Avowed and The Outer Worlds, is reportedly at risk of closure. The studio is currently in negotiations with Xbox leadership as part of what is being described as a “reset” of Microsoft's gaming business.
According to reports from The Game Business, Obsidian is not the only studio facing this uncertainty. Other Microsoft-owned teams currently negotiating to avoid closure include Undead Labs (State of Decay), Double Fine (Psychonauts), Ninja Theory (Hellblade), and Compulsion (South of Midnight). Reports also suggest that Arkane Lyon, the developer of the upcoming Marvel's Blade, is under similar threat.
A Challenging Landscape for Obsidian
The potential for closures or studio spin-offs follows a difficult period for Obsidian. Both Avowed and The Outer Worlds 2 failed to meet commercial performance targets. While the studio saw success with 2025's Grounded 2, that project had a significantly shorter and cheaper development cycle compared to the studio's other recent output.
Obsidian currently has no newly announced projects. Despite persistent fan interest in a follow-up to the studio's beloved Fallout: New Vegas, studio design director Josh Sawyer noted in a recent interview that such decisions remain entirely with "titans" above his pay grade. "I'm just a director... there are titans above me who decide what happens with IPs," Sawyer explained when asked about the possibility of working on the Fallout franchise again.
The "Reset" at Xbox
The current instability stems from a "reset" memo issued by new Xbox boss Asha Sharma. The memo highlighted a 3% accountability margin and noted that while Microsoft has invested over $20 billion in content, platforms, and hardware over the past five years, annual revenue has declined by nearly half a billion dollars in that same timeframe. "Going forward, this cannot continue," Sharma stated.
Microsoft has signaled that it is re-evaluating its investment strategy. This includes pulling funding for an upcoming fantasy project from IO Interactive, though the company maintains that it is not reducing its overall investment in games, but rather shifting its focus toward "highest priorities."
The situation remains fluid, with reports suggesting that studios may be sold rather than closed, though layoffs remain a possibility in either scenario. Unionized Xbox workers have publicly called for immediate bargaining, stating they are "done paying for executives' failures." A Microsoft spokesperson confirmed the company is continuing to negotiate with the CWA to reach agreements across the organization.
This uncertainty follows a massive round of layoffs in July 2025, which saw 9,000 staff cuts across Microsoft and the closure of studios such as The Initiative.