After leaving the Xbox Game Studios portfolio, State of Decay 3 developer Undead Labs is now an independent, employee-owned studio. The developer had previously announced State of Decay 3 all the way back in 2020–partly to keep the project and the studio on Microsoft’s radar–as the company embarked on an acquisition spree. Now one of several departures from Microsoft’s gaming division following the bloody “Xbox reset” that has seen scores of jobs slashed throughout 2026, Undead Labs also had to cut staff as it entered a new era. But was there any behind-the-scenes drama that led to its exit from Xbox?
Speaking to The Game Business, studio boss Philip Holt said that ultimately, nothing went wrong. It was more a case of reading the room and making a proposal to Microsoft that the company accepted. “It was an accelerated period of time for Microsoft’s divestiture,” Holt explained. “We had a lot of interest. I also thought that because we were so close to being in revenue, the amount of capital that we needed to finish [State of Decay 3] was not an insurmountable amount that we couldn’t go raise it ourselves. I knew other studios were doing management buyouts, so I submitted an offer for a management-led acquisition, and Microsoft thought that would be a good idea.”
Holt also addressed why State of Decay 3 was originally announced so far in advance, as in the eight years that it was under the Xbox umbrella, it never released a single game–but it did drop 38 updates for the popular State of Decay 2. He explained that a small team had been working on the game since 2020–with development picking up a few years later–and that announcing the game so early helped the studio avoid being lost in the shuffle during Xbox’s buying spree of publishers like Bethesda and Activision Blizzard.
“I didn’t think Microsoft was done being acquisitive, and I didn’t think they’d continue buying small developers; I assumed they’d start buying big things. I was a little worried about getting swallowed up or divested before we had a chance to present to the world what we were working on. So, it was a bit of a marker on the table. I was saying, State of Decay 3, we’re announcing it, the audience knows it’s in development, and here’s a trailer to demonstrate our vision.”
State of Decay 3 will still launch day-one through Game Pass, and Holt credited the subscription service with helping the horror franchise reach 25 million players. He also said that becoming an independent studio allowed Undead Labs to focus on serving an audience and being profitable. “We need to make a profit, we need to be sustainable, we need to pay ourselves and our partners–and it is a goal. This is not a charity. But it’s not the number-one most important objective.”
Undead Labs joins Double Fine and Compulsion Games as former Xbox studios, but the future of Hellblade and DmC: Devil May Cry developer Ninja Theory is looking grim. After deals to acquire the studio fell through, it looks like the studio will soon be shut down.
