Xbox is once again celebrating its Xbox Studios “reset” by laying off over 200 people from 343 Studios and other first-party studios; it’s getting hard to find a reason to feel good about the games industry. But it’s not all bad news today, with Undead Labs having completed its push for independence. As Xbox continues to gut the development teams it once saw as valuable, this news is a sliver of hope.
Like Double Fine and Compulsion Games before it, Seattle-based Undead Labs announced today that it has completed its separation from Xbox. The studio said it is now operating as an entirely independent game development studio. And more importantly, it’s now worker-owned.
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“Independence brings us closer to our community and lets us focus on what matters most: making the best games we can and earning the continued support of the people who choose to spend their time with us,” said Philip Holt, Studio Head of Undead Labs, in a release to the press. “State of Decay exists because millions of players have made that choice over the years, and we’re dedicated to honoring their trust.”
Since the start of 2026, Microsoft has laid off over 1,800 people at Xbox. This has been part of the publisher’s restructuring plan, which seems to have accelerated under CEO Asha Sharma, whose past career included work at Meta Platforms (then Facebook). This year’s disregard for employees follows Microsoft’s waves of layoffs in 2024, when the company and its owner cut 2000 employees across its gaming areas, most notably Xbox and Activision Blizzard.
State of Decay 3 is still on target for an end-of-year beta.
In addition to the separation announcement, the studio confirmed that its teams are still actively developing State of Decay 3 and retain control of the title. The game is currently in alpha, and the team continues working toward its previously announced milestone: entering a closed beta before the end of 2026. With the milestones staying in place, the game’s launch is still targeted for 2027.
Per the studio, this separation marks a new chapter in a relationship between Undead Labs and Microsoft that spans more than 15 years, but one where they regain control of their property and studio. After starting its partnership with Microsoft 13 years ago with the launch of State of Decay, Undead Labs was acquired by the company in 2018.
Undead Labs will remain in partnership with Microsoft on State of Decay 3.
In a response shared through a press release, Holt added to his initial comments by stating his gratitude to Xbox for the time the studio spent with the publisher. “We’re enormously grateful for our years as part of XBOX and for everything that relationship has made possible,” Holt said. “Microsoft has been part of the State of Decay story from the very beginning, and we’re proud of everything we’ve accomplished together.”
The quote makes it clear that State of Decay 3 will still operate within the context of a Microsoft partnership. That said, the studio has not shared what the partnership will look like under its new independence.
State of Decay 3 will release in 2027 on Xbox Series X|S (Game Pass), PC, and PlayStation 5.
