Undead Labs. The studio behind the upcoming survival game State of Decay 3, is reportedly under consideration for closure or sale by Microsoft — the news comes as part of a wider restructuring of Xbox’s first-party studios, with multiple titles and teams at risk. The potential closure of the studio could jeopardize the release of State of Decay 3, which was showcased in a trailer earlier this month at the Xbox Games Showcase and has attracted thousands of players in its alpha test.

Financial Pressures and Studio Sales

According to GamesBeat. The decision is being driven by Microsoft’s corporate CFO, Amy Hood, who has pushed for cost-cutting measures across Xbox to offset losses — Hood previously demanded a 30% margin for Xbox, a target that has contributed to the current financial strain. As part of this effort. Undead Labs could be one of several studios up for sale, including Double Fine, Ninja Theory, and Compulsion Games, but If no buyer is found, these studios could face closure.

Undead Labs has 110 employees. According to reports, and its potential closure would affect more than 400 jobs across Xbox first-party studios. The layoffs are expected to begin as early as July 2026, with Microsoft aiming to reduce costs by divesting smaller studios rather than maintaining long development cycles. This approach is part of the broader “100-Day Reset” outlined by Xbox CEO Asha Sharma.

Development and Market Expectations

State of Decay 3 is nearly complete and has already generated significant interest among gamers. The game’s alpha test received thousands of sign-ups and was well-received by players and critics. A trailer released at the Xbox Games Showcase in June 2026 showed the game’s improved graphics and expanded gameplay features. According to Philip Holt, head of Undead Labs, the trailer was released even before development officially began, indicating the studio’s confidence in the project.

However, the potential closure or sale of Undead Labs could disrupt the development timeline. Reports from OpenCritic and Clavecd.es suggest that a change in ownership or a studio shutdown could cause major delays beyond the current 2027 release window. The game was already pushed back from an earlier release date, adding to concerns about its final timeline.

Uncertain Future for the Studio and the Game

If Undead Labs is not sold, the studio could face closure by the end of Microsoft’s fiscal year on June 30, 2026. In that case, the fate of State of Decay 3 remains uncertain. The game is currently in a near-complete state, with playable builds and a functioning alpha test, but without a stable development team or funding, its release could be indefinitely delayed or canceled.

There is also the possibility that the studio could gain independence through a self-funded venture, as is being discussed for other studios like Double Fine and Ninja Theory. Undead Labs previously operated as an indie studio before being acquired by Microsoft in 2017, and it could return to that model if a sale or independent funding path is found.

Jeff Strain, the original founder of Undead Labs and a veteran of Blizzard’s World of Warcraft and ArenaNet’s Guild Wars, has already left the company. His departure raises questions about the studio’s leadership if it is to continue operations independently.

Undead Labs has confirmed that State of Decay 3 will be released on Xbox Series X|S, PlayStation 5, and PC, but the potential instability of the studio could impact its availability on multiple platforms. The game’s cross-platform release was announced as part of a broader shift toward platform-agnostic game development.