State of Decay studio Undead Labs goes independent after Xbox restructuring, but lays off “a significant number” of the team in doing so

State of Decay studio Undead Labs has achieved independence following Microsoft’s restructuring of Xbox operations. The Seattle-based developer, owned by Microsoft since 2018, successfully completed its divestment and became an independent, employee-owned studio. However, the transition came with significant human cost: the studio announced layoffs affecting a substantial portion of its workforce.

While the company did not disclose the exact number of positions cut, it confirmed that some employees working on State of Decay 3 were among those impacted. A statement from leadership acknowledged the difficulty of the moment, stating, “It’s difficult to reach this moment knowing that not everyone who helped get us here gets to make the rest of the journey with us,” while describing those affected as “exceptionally talented developers.”

Undead Labs’ independence represents part of Microsoft’s broader Xbox restructuring, which has included multiple rounds of layoffs in 2026. The studio was among five that Microsoft announced plans to separate from in July, following an initial round of cuts. Despite the staff reductions, the company confirmed that development of State of Decay 3 remains actively underway.

The separation frames independence as bringing the studio “closer to our community” and allowing focus on game development, though the timing of the layoffs—announced within hours of the divestment completion—highlights the challenging transition from corporate ownership to independent operations.

State of Decay studio Undead Labs goes independent after Xbox restructuring, but lays off “a significant number” of the team in doing so

Sources