Journalist points out that Xbox may suspend Avowed 2 to focus on new Fallout title

The restructuring implemented by Microsoft has generated significant impacts on internal studios, and Obsidian Entertainment, developer of games such as The Outer Worlds, Avowed, Grounded, and Pentiment, suffered from a new round of layoffs, resulting in the loss of approximately 25% of its workforce.

Details of the Layoffs

As reported by Kotaku, the number of laid-off employees ranges between 60 and 70 people. The cuts covered professionals from various areas of the studio, including production, art, programming, design, writing, quality assurance (QA), and recruitment. Among those affected were experienced developers with over ten years of service at Obsidian, as well as the art director of The Outer Worlds and the company's sole recruiter.

Impact on Current Projects

These layoffs are part of the first phase of a larger restructuring announced by Microsoft, which foresees the elimination of thousands of positions over the next fiscal year. Most of the dismissals occurred on Monday (6th), although some employees have been notified that they will leave the company in subsequent waves in the coming months.

Sources consulted by Kotaku indicated that the remaining members of Obsidian are still awaiting guidelines on how the projects under development will be reorganized after this considerable reduction in personnel. Nevertheless, work on Grounded 2, which is in early access, and the expansion of The Outer Worlds 2 should proceed without interruption.

Future of Titles and Strategy

Plans for the studio's other titles remain uncertain, and it is expected that leadership will provide new information during a general meeting scheduled for Monday (7th). Microsoft, when contacted by Kotaku, did not offer comments on the details of the layoffs.

Founded in 2003 by former members of Black Isle Studios, Obsidian established itself as a prominent name in the Western RPG genre. Throughout its history, the studio has released notable works such as Star Wars: Knights of the Old Republic II, Neverwinter Nights 2, Alpha Protocol, Fallout: New Vegas, and Pillars of Eternity, in addition to more recent productions like The Outer Worlds, Pentiment, Grounded, and Avowed.

Since being acquired by Microsoft in 2018, Obsidian has become a strategic pillar of Xbox Game Studios, being responsible for multiple franchises and simultaneous projects. The recent layoffs reinforce the context of restructuring faced by the Xbox division, which has already affected several studios recently, as part of Microsoft's strategy to optimize costs and realign investments in game development.

The Xbox division may undergo a new and significant restructuring in the coming days. According to information released by journalist Tom Warren of The Verge, Microsoft is reportedly evaluating the closure of Arkane Lyon, a studio known for developing titles such as Dishonored and Deathloop, and is also considering the cancellation of the highly anticipated game Marvel’s Blade.

New layoffs and project risks

Such measures would be part of a new wave of layoffs scheduled to begin on July 6th. It is important to note that Microsoft has not yet issued any official confirmation regarding these rumors.

The title Marvel’s Blade, which was presented during The Game Awards in 2023, is developed by Arkane Lyon and would be the first game from the studio to feature the Marvel vampire hunter. According to rumors, the project is facing scheduling issues and exceeding the established budget, which has prompted Microsoft to consider its discontinuation. Since its announcement, Arkane has not provided new updates, images, or gameplay details about the game's development.

Studios under Microsoft's review

The restructuring evaluation is not limited to Arkane Lyon; other Xbox-owned studios are also being reviewed. Cited sources, including The Verge, Bloomberg, and GamesBeat, indicate that Microsoft is studying options such as sale, team reorganization, or closure for studios like Compulsion Games, Double Fine, Ninja Theory, Undead Labs, and Arkane Lyon. There is no definition yet on what actions will be taken regarding each of these groups.

Changes led by new management

Expectations for further cuts intensified after an internal communication issued by the new CEO of the Xbox division, Asha Sharma, along with content director Matt Booty. In this memo, the company admitted that it had expanded its operations beyond what was considered sustainable. The statement, as reported by international outlets, says: 'We are over-sized. From now on, this cannot continue.'

Unions representing Xbox employees have also criticized the company's lack of transparency, requesting negotiations before the implementation of cuts.

History of cuts at Arkane and Xbox

If the closure of Arkane Lyon is confirmed, it would represent another setback for one of the industry's most acclaimed studios. In 2024, Microsoft had already shut down Arkane Austin, responsible for the games Prey and Redfall, during another round of cuts that also affected Tango Gameworks, Alpha Dog Games, and several Bethesda studios. At that time, Dinga Bakaba, creative director of Arkane Lyon, publicly protested the decision, asking executives to treat developers as artists, and not merely as financial assets.

Xbox has been undergoing a long period of restructuring since the acquisition of Activision Blizzard, finalized in 2023 for approximately US$69 billion. During this period, Microsoft has promoted various reorganizations in its gaming division. In 2024 alone, about 1,900 employees were laid off across the Xbox, Activision, Blizzard, and ZeniMax teams. Additionally, another 650 professionals lost their jobs that year, while several studios were sold or closed. In 2025, a new wave of layoffs affected approximately 9,000 employees in different sectors of the company. Rumors suggest that the cuts planned for July 2026 could impact Microsoft partners, such as IO Interactive, which recently confirmed the end of an external partnership and reduced its staff. However, Hideo Kojima's project OD should not be affected.