Following weeks of rumours, reports and ominous hints from Xbox CEO Asha Sharma, the bloodbath has finally begun.

A lot is happening today, and reporting is still coming out. Xbox has not officially announced every single detail itself, but the reporting we’re going to discuss here comes from extremely reliable sources, including Jason Schreier and Brody Ford at Bloomberg, Tom Warren at The Verge, and Christopher Dring at The Game Business.

This article is going to focus purely on the studios themselves, which is what I suspect most people will be interested in. Five studios are, at the moment, reportedly being affected: Double Fine, Compulsion Games, Ninja Theory, Undead Labs and Arkane Lyon.

This is not just about job cuts. Sharma has repeatedly said that Microsoft is planning to “reset” Xbox, and that appears to be exactly what we are seeing: huge layoffs, studios being sold or spun out, and a much leaner Xbox focused more heavily on its biggest franchises.

Importantly, though, this does not appear to be a straightforward studio closure story. According to The Game Business, no studios are being closed today. Instead, four studios are leaving Xbox, while a fifth, Arkane Lyon, is entering a formal process to determine its future.

Double Fine Productions

Jumping into the studios, we begin with Double Fine, which is set to regain its independence.

CEO Tim Schafer will reportedly be taking the reins back from Microsoft, and Double Fine will apparently keep all of its IP, back catalogue, and future revenue from that back catalogue. Even more surprisingly, it will also apparently receive runway funding from Microsoft to begin its next project while it seeks further financing.

My gut instinct here is that there may be some sort of deal on the table where Double Fine continues to produce games for Microsoft in one form or another, a bit like Toys for Bob after it gained its independence. That studio has gone on to work on the new Spyro game which made its debut at the Xbox Showcase this summer. The returning purple dragon will be published across Xbox, PlayStation, Switch and PC by Xbox themselves.

The bigger question is whether Double Fine can survive on its own. The studio is beloved, but it is based in San Francisco, which is not exactly the cheapest place in the world to run a game studio, and Double Fine is not known for turning out massive financial hits. Most likely, I would expect to see cuts at Double Fine as well, but at least the studio has a chance to continue.

Compulsion Games

Much the same can be said for Compulsion Games, which is also returning to independent status.

Like Double Fine, Compulsion will reportedly be allowed to keep its IP and back catalogue, and The Game Business says it will also receive some runway funding from Microsoft.

I previously covered that many Compulsion Games employees were already seeking new work on LinkedIn, so this outcome is not exactly coming out of nowhere. Like Double Fine, though, this is probably about the best outcome Compulsion could have hoped for under the circumstances. There is at least a chance the studio can survive and perhaps even thrive. That is much better than simply being closed outright.

Much like Double Fine, I suspect there might be some sort of deal for future Xbox games. Perhaps some contract regarding any future games being put onto Game Pass? Maybe a publishing deal?

Compulsion’s last game, South of Midnight, didn’t do great financially, but it did snag the studio a Peabody Award.

Ninja Theory

Now things get even more interesting, because Ninja Theory is reportedly being sold to an undisclosed buyer.

According to The Game Business, Ninja Theory has “entered terms” with a new owner, although that owner has not yet been announced and the deal has not closed. The Game Business also reports that the new owner will get Ninja Theory’s IP and back catalogue.

Meanwhile, the new Hellblade game, Senua, which was recently announced at the Xbox Games Showcase, is still expected to continue development. According to The Game Business, the game is currently due in 2027 and has passed 100,000 Steam wishlists since its reveal, citing GameDiscover data, so there’s at least some interest in a new, more action-focused Senua game.

Previously, it was odd for Xbox to show debut Senua trailer at its summer showcase while Ninja Theory’s future was reportedly uncertain. Later reporting suggested Microsoft may have shown the trailer partly to help Ninja Theory attract a buyer.

Based on today’s report, it seems that may have worked.

Undead Labs

Much the same can be said of State of Decay 3. It was also shown at the Xbox Showcase, again likely in a bid to encourage…well, a bid.

Undead Labs is also reportedly being sold to an undisclosed buyer. Like Ninja Theory, the deal has not yet closed, and the new buyer will apparently receive the studio’s IP and back catalogue.

The current project, State of Decay 3, is still expected to continue. The Game Business reports that the game is due next year and has nearly 930,000 Steam wishlists, although it is worth noting that the Steam page has been live since June 2024.

Based on the reporting from Bloomberg and The Verge, both State of Decay 3 and Ninja Theory’s Senua are expected to continue with Xbox still involved in some capacity. Exactly what the final publishing arrangements look like after these deals close is not entirely clear, but the important point for now is that neither project appears to have been cancelled.

There’s a strong chance both State of Decay 3 and Senua will be published under the Xbox name.

Arkane Lyon

The final studio to discuss is Arkane Lyon, the surviving piece of Arkane, and easily the most uncertain case being reported today.

Arkane Lyon is seemingly not being sold immediately. Instead, Microsoft is beginning the required consultation process in France to review “strategic options.” Because Arkane Lyon is based in France, this process is more complicated and could take months.

The Game Business reports that Xbox is hoping it can avoid closure for Arkane as well, but right now the studio’s future is clearly uncertain.

Arkane Lyon is currently working on Marvel’s Blade, which Microsoft says remains in development. Tom Warren reports that Blade has been delayed and is running over budget, but at least for now, the game has not been cancelled.

It was also reported just the other day that MachineGames boss Jerk Gustafsson had reportedly been running, or at least helping run, Arkane Lyon since summer 2025. At the time, some people theorised that this could mean a merger between MachineGames and Arkane Lyon, but based on today’s reporting, that does not appear to be what is happening.

So, to be very clear: Blade is still alive, but Arkane Lyon is now officially in limbo.

The Best Possible Outcome Can Still Suck

Undeniably, what is happening at Xbox today is horrifying, especially given the number of people reportedly being laid off, which may amount to around 3,200 over the next year. I’ll discuss the job losses in a separate article, because they deserve their own space.

Focusing purely on the studios for a moment, though, this is probably about the best possible outcome we could have hoped for. Which sounds horrible to say.

Yes, it absolutely sucks that Xbox is getting rid of them at all. It also sucks that Microsoft bought these studios, folded them into the Xbox machine, and has now decided several of them no longer fit the future of the business. But in practical terms, Microsoft does appear to be handling the studio side of this better than it could have.

Double Fine and Compulsion are not just being cut loose. They are reportedly being allowed to go independent with their IP, their back catalogues, future revenue from those catalogues, and some runway funding from Microsoft to help them begin their next projects while they seek further financing.

That last part is important. Xbox almost certainly could have retained those IPs and catalogues if it wanted to. Instead, at least according to today’s reporting, it is letting the studios take them. In that sense, Microsoft is being about as generous as you could realistically expect any giant corporation to be in this situation.

Well, if you ignore the fact that it bought these studios and is now getting rid of them in the first place.

Ninja Theory and Undead Labs are in a slightly different position, as they are reportedly being sold to undisclosed buyers, but even there, the goal seems to be keeping the studios alive and getting Senua and State of Decay 3 over the finish line. They get to live and fight another day, with the support of their new owners behind them, assuming the deals go through.

Arkane Lyon remains the big unresolved case. Xbox is beginning the required consultation process in France to review “strategic options,” and The Game Business reports that Microsoft hopes it can avoid closure for that team as well.

Again, this is probably the best we could have hoped for. But the best you can hope for can still suck. And this news does still suck.

Double Fine, Compulsion, Ninja Theory, Undead Labs and Arkane were all purchased during the era when Xbox was aggressively expanding its first-party portfolio. At the time, the strategy was to feed Game Pass, broaden Xbox’s output, and compete more aggressively with both PlayStation and Nintendo.

Now, under Asha Sharma, Xbox is saying it cannot and should not own every great independent studio. Instead, the company appears to be paring everything back, focusing more heavily on its biggest IPs such as Halo, Fallout and, if recent reporting is to be believed, even Wolfenstein.

The studios being sold, spun out, or, in the case of Arkane Lyon, left in limbo, are at least being given a chance to fight for their futures. That is better than being thrown out on the street with nothing.

But that future is still uncertain. Can studios like Double Fine and Compulsion survive independently in 2026? They did previously, but it is a very different world now.

Let’s hope they can. Let’s hope they keep making weird, unique, interesting and fun games.

Because Xbox clearly does not want to be that kind of home anymore.