In a major shakeup for the industry, Undead Labs—the developer behind State of Decay 3—is officially splitting from Xbox. The move comes as part of a significant restructure at Microsoft, which includes the layoff of 3,200 employees across its gaming division.

The departure of Undead Labs from under the Xbox umbrella is part of a broader shift that has seen several studios either move to new ownership or transition to independent operations. While the studio is currently finding a new home, the specific management taking over the team remains unannounced.

What the Departure Means for State of Decay 3

Despite the separation, development on the long-awaited zombie survival sequel continues. Recent reports indicate that the exit deal between the studio and Xbox includes the continued funding necessary to bring the project to completion. However, the move fundamentally changes the distribution expectations for the title.

Because the studio is no longer operating under Xbox-controlling terms, State of Decay 3 is not currently obligated to launch on Xbox Game Pass. This development is a notable shift, especially considering the game was a featured title during the Xbox Games Showcase in June 2026, where it finally secured a 2027 release window after six years of anticipation.

Broader Xbox Restructuring

The decision to part ways with Undead Labs is tied to larger financial challenges within the company. Xbox CEO Asha Sharma recently noted that the gaming brand is seeing margins three to 10 times lower than comparable publishing businesses, attributing the struggle to bets on Game Pass and multi-platform strategies that have not paid off as expected.

Undead Labs is not the only studio affected by this wave of changes. Other teams previously under the Xbox banner are also navigating new paths:

  • Double Fine and Compulsion Games have officially gone independent.
  • Ninja Theory is currently in the process of finding a new home.
  • Arkane, the developers currently working on Marvel’s Blade, is entering a consultation period with its Works Council to determine potential strategic options.

As the company attempts to stabilize, Sharma has emphasized that “a healthy Xbox” must be the priority, even as it sheds key internal studios to navigate the current financial environment.