Four Xbox Studios Leave Microsoft As Arkane Lyon Faces Uncertain Future – WGB

Following weeks of rumours, reports and dire comments from Xbox CEO Asha Sharma, the bloodshed has begun.

A lot is happening today, and the reporting is still coming out. Xbox hasn’t officially announced all the details themselves, 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 will focus more on the studios themselves, which I suspect many people will be interested in. Five studios, meanwhile, are reportedly 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 plans to “reset” Xbox, and it seems that’s exactly what we’re seeing: massive layoffs, studios being sold or outsourced, and a leaner Xbox focused more on its biggest franchises.

Importantly, however, this does not appear to be a straightforward case of studio closure. According to The Game Business, no studios are closed today. Instead, four studios are leaving Xbox, and the fifth, Arkane Lyon, is entering an official process to decide its future.

Double Fine Productions

Jumping into the studios, we start with Double Fine, which is set to find its own independence.

CEO Tim Schafer will reportedly take the reins back at Microsoft, and Double Fine will apparently retain all of its IP, back catalog, and future revenue from the back catalog. Even more surprising is that it will also receive runway funding from Microsoft to start its next project while seeking additional funding.

My gut feeling here is that there might be some kind of deal on the table where Double Fine continues to produce Microsoft games in one form or another, similar to Toys for Bob after they get their independence. That studio continued to work on a new Spyro game that debuted at the Xbox Showcase this summer. Purple Dragon Returns will be published across Xbox, PlayStation, Switch and PC by Xbox themselves.

The big question is whether Double Fine can survive on its own. The studio is popular, but it’s based in San Francisco, which isn’t necessarily the cheapest place in the world to host a game studio, and Double Fine isn’t known for releasing financial hits. Presumably, I would expect to see cuts from Double Fine again, but at least the studio has a chance to move on.

Compulsion Games

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

Like Double Fine, Compulsion will be allowed to keep its IP and back catalog, and Game Business says it will also receive some financial support from Microsoft.

I previously posted that many of the employees of Compulsive Games were already looking for a new job on LinkedIn, so this result does not come out of nowhere. Like Double Fine, however, this is probably about the best result Compulsion could expect under the circumstances. There is at least a chance that the studio can survive and maybe even thrive. That’s much better than just being shut down.

Similar to Double Fine, I suspect there may be some sort of deal for upcoming Xbox games. Maybe some contract regarding any upcoming games that will be included in Game Pass? Maybe a publishing deal?

Compulsion’s last game, South of Midnight, did not do well financially, but it did garner 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 been announced and the deal is not yet closed. Game Business also reports that the new owner will receive Ninja Theory’s IP and back catalog.

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

Previously, it was strange that Xbox showed the first trailer for Senua at its summer show while the future of Ninja Theory was reportedly uncertain. Recent reports suggested that Microsoft may have shown the trailer in part to help Ninja Theory attract buyers.

Based on today’s report, it looks like that might work.

Undead Labs

The same can be said for State of Decay 3. It was also shown at the Xbox Showcase, and probably with the intention of encouraging…well, bid.

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

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

Based on reports from Bloomberg and The Verge, both State of Decay 3 and Ninja Theory’s Senua are expected to continue with Xbox still holding a role somewhere. What the final publishing plans look like after these deals are closed is unclear, but the bottom line for now is that no project seems to have been canceled.

There is a strong possibility that State of Decay 3 and Senua will be published under the Xbox name.

Arkane Lyon

The last studio in question is Arkane Lyon, the remaining part of Arkane, and it’s an uncertain case that is easily reported today.

Arkane Lyon doesn’t seem to be selling fast. Instead, Microsoft begins the necessary consultation process in France to review “strategic options.” Because Arkane Lyon is based in France, this process is complicated and can take months.

Game Business reports that Xbox hopes to avoid Arkane’s shutdown, but for now the future of the studio is clearly uncertain.

Arkane Lyon is currently working on Marvel’s Blade, which Microsoft says is still in development. Tom Warren reports that Blade is delayed and running on budget, but at least for now, the game hasn’t been canceled.

It was also reported the other day that MachineGames boss Jerk Gustafsson has reportedly been running, or at least helping to run, Arkane Lyon since summer 2025. At the time, some people speculated that this might mean a merger between MachineGames and Arkane Lyon, but based on today’s reports, that doesn’t seem to be happening.

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

The Best Possible Result You Can Still Absorb

Undoubtedly, what is happening at Xbox today is alarming, especially considering the number of people reported to be laid off, which could be around 3,200 in the next year. I will discuss job losses in a separate topic, because they deserve their place.

Focusing on the studios for a while, however, this is probably about the best result we could have hoped for. Which sounds bad to say.

Yes, it’s amazing that the Xbox is self-destructing at all. It’s also troubling that Microsoft bought these studios, folded them into the Xbox console, and has now decided that several of them are no longer fit for the future of the business. But in practical terms, Microsoft seems to be handling the studio side better than it could have.

Double Fine and Mandatory are not limited to relaxation. They are reportedly allowed autonomy over their IP, their back catalogs, future revenue from those catalogs, and some runway funding from Microsoft to help them start their next projects while they seek funding.

That last part is important. Xbox could almost certainly keep those IPs and catalogs if they wanted to. Instead, at least according to today’s report, it lets the studios take it. In that sense, Microsoft is about as generous as you can honestly expect any large company to be in this situation.

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

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

Arkane Lyon remains a major unsolved case. Xbox is starting the necessary consultation process in France to review “strategic options,” and Game Business reports that Microsoft hopes to avoid a shutdown of that group.

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

Double Fine, Compulsion, Ninja Theory, Undead Labs and Arkane were all bought at a time when Xbox was aggressively expanding its first-party portfolio. At the time, the strategy was to offer Game Pass, expand Xbox output, and compete more with both PlayStation and Nintendo.

Now, under Asha Sharma, Xbox says it cannot and should not own all independent studios. Instead, the company seems to be pulling everything back, focusing more on its big IPs like Halo, Fallout and, if recent reporting is to be believed, even Wolfenstein.

Studios sold, spun off, or, in the case of Arkane Lyon, left in limbo, at least given a chance to fight for their future. That’s better than being dumped on the street empty handed.

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

Let’s hope they can. Let’s hope they continue to make weird, unique, interesting and fun games.

Because Xbox apparently doesn’t want to be that kind of home anymore.