Undead Labs splits from Xbox, goes independent, and lays off staff the same day

The studio behind State of Decay announced its independence from Microsoft this week, but the statement came bundled with confirmation of significant staff cuts.

Undead Labs, the studio behind the State of Decay franchise, announced this week that it has completed its separation from Xbox and is now operating as an independent, employee owned company. On paper that sounds like good news. The catch is that the same announcement confirmed layoffs, with the studio saying goodbye to what it called "a significant number" of colleagues without giving an exact headcount.

The official statement didn't shy away from how heavy the moment feels: "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." Studio head Philip Holt tried to frame the split in a more hopeful light, saying independence brings the team closer to its community and lets it focus on making the best games possible while keeping players' trust.

The good news is that the studio's flagship project, State of Decay 3, is still moving forward. Reports indicate the game is currently in alpha, with a closed beta planned before the end of the year and a 2027 release window targeting PC, Xbox Series X/S, and PS5, a first for the franchise. Even outside Xbox Game Studios now, the plan is for the game to still launch day one on Game Pass, through a new publishing partnership.

Context matters here too. This news lands just days after another round of cuts inside the Xbox umbrella, when Halo Studios and other parts of Microsoft Gaming lost hundreds of positions. That's not a coincidence. Microsoft has been heavily restructuring its studio portfolio throughout 2026, with more and more first parties getting repositioned, sold off, or, like Undead Labs here, set loose to fend for themselves.

Going independent is a real double edged sword, and State of Decay fans have watched other studios learn that the hard way before. It can mean more creative freedom and less corporate red tape, but it also strips away the financial safety net a giant like Microsoft provides. What stands out is the timing: leaving Xbox should be cause for celebration, yet it arrived bundled with people losing their jobs mid development on the franchise's most anticipated entry. A smaller team is now the one carrying State of Decay 3 to the finish line, and that's worth watching closely between now and 2027.