Fresh concerns have emerged regarding the future of State of Decay 3 and its developer, Undead Labs. Overnight reports suggest both the game and the studio are under threat of closure as part of impending layoffs at Xbox.
According to reporting from Gamesbeat and corroborated by Windows Central, work is underway behind the scenes to find a buyer for the Seattle-based Undead Labs. Should a buyer not be found, Microsoft may proceed with canceling State of Decay 3. This situation places Undead Labs among several Microsoft-owned studios reportedly negotiating their potential buyouts, including Double Fine, Compulsion, and Ninja Theory. Hundreds of jobs across Microsoft's gaming division, encompassing Bethesda and Activision Blizzard studios, are reportedly at risk.
State of Decay 3 was featured at Microsoft's recent Xbox Games Showcase, where a PlayStation 5 version and a 2027 release window were confirmed, though the lack of a firm date disappointed some fans. This July marks six years since the third installment in the zombie survival franchise was announced. While gameplay footage from ongoing playtests has surfaced, State of Decay 3 is not expected to release this year, and current reports suggest it may never be released at all.
These developments follow an internal memo from Xbox CEO Phil Spencer, which signaled significant layoffs and studio closures. Spencer cited a decline in annual revenue over the past five years, despite substantial investments, stating that "Going forward, this cannot continue." Analysts have noted that some studios, while valuable for prestige, may not align with financial objectives. Concerns about potential closures initially focused on studios like Compulsion, Double Fine, and Ninja Theory, which have not achieved significant commercial success recently.
Further reports indicate that Microsoft has begun taking action, with Xbox Game Studios boss Craig Duncan stepping down. Bloomberg's Jason Schreier has warned of substantial cuts within Xbox.
In response to layoff reports, unionized Xbox workers have called for immediate bargaining, stating they are "done paying for executives' failures." A Microsoft spokesperson acknowledged the workers' right to express their views and affirmed the company's commitment to negotiating in good faith with the CWA to reach agreements across Xbox, referencing a history of successful bargaining agreements.
This situation echoes the mass layoffs that occurred in July 2025, which led to the cancellation of titles like Rare's Everwild and the shutdown of studios such as The Initiative. Staff remaining at Xbox are reportedly bracing for a similar scenario. Recent claims suggest that Spencer is accelerating development on new entries in franchises like The Elder Scrolls, Fallout, and Halo. Reports from The Information indicate that Microsoft has not ruled out transforming the Xbox brand into a wholly-owned subsidiary, potentially operating it as a joint venture or even selling it.