Microsoft may shut down Undead Labs weeks after State of Decay 3's best showing yet
Microsoft is reportedly considering closing or selling Undead Labs — the Seattle studio behind State of Decay 3 — just weeks after the game received its first proper gameplay reveal and a confirmed 2027 release window. The timing is striking: the zombie survival game spent years in development limbo, finally showed real momentum at the June 2026 Xbox Games Showcase, and now the studio making it may not survive to ship it.
The report comes from GamesBeat, with independent corroboration from Windows Central. If no external buyer steps forward before Xbox's fiscal year closes on June 30, closure is planned for early July. That would put 110 Undead Labs employees out of work.
The numbers behind the cuts
Undead Labs is not the only studio in the crosshairs. Bloomberg reports that new Xbox CEO Asha Sharma is overseeing a broad restructuring aimed at fixing the division's chronic unprofitability — Xbox operates at roughly a 3% profit margin, with pre-Activision figures pointing to around $20 billion in losses over five years. CFO Amy Hood is pushing hard on those margins.
The potential job losses span multiple studios: 100 at Double Fine (Psychonauts), 90 at Compulsion Games (South of Midnight), and 135 at Ninja Theory (Hellblade) — alongside the 110 at Undead Labs. Around 1,000 total Xbox layoffs are rumoured across the wider restructuring.
A credibility problem
The CWA union, which represents workers at several Xbox studios, is not staying quiet. Engadget reports the union argues Microsoft has the financial resources to keep these studios open and is redirecting money elsewhere rather than supporting its own developers. The union also criticised the absence of advance warning — a pattern already seen with Bethesda and Arkane closures.
For players, State of Decay 3 is still confirmed for PS5, Xbox, and PC in 2027, and will be on Game Pass at launch — so a studio closure would not cancel the game outright. What happens to development if Undead Labs shuts down, however, remains unclear. Microsoft has not publicly addressed a contingency plan.
CEO Sharma came in promising a renewed focus on exclusive titles and studio investment. Closing four studios in the same fiscal year — including one still mid-development on a flagship title — is a difficult position to defend.
