Undead Labs may be caught in the next wave of Xbox cuts just weeks after Microsoft finally gave State of Decay 3 a proper gameplay showing.
The studio behind the zombie survival series is reportedly one of the Xbox teams Microsoft could sell or shut down as part of a wider restructuring push. The reports arrive at an awkward moment for Xbox. State of Decay 3 was one of the more important first-party games shown during the Xbox Games Showcase earlier this month, where it received its first real gameplay trailer and a 2027 release window.
State of Decay 3 has been hanging over Xbox's release slate since 2020. The game was announced with a cinematic trailer before it had much to show, then spent years in the background while fans waited for proof that the sequel was moving forward.
That proof finally arrived on June 7. Xbox showed open-world exploration, co-op survival, settlement building, weapon crafting and the return of the series' zombie threats. Undead Labs also confirmed the game is planned for Xbox Series X|S, PC, Steam, cloud, PlayStation 5 and Game Pass in 2027.
For a franchise built on scavenging, community management and messy survival choices, the new footage looked like the clearest version yet of what Undead Labs has been trying to build. It also made the timing of the shutdown reports feel stranger. Xbox has just started selling players on the sequel again, and now the studio making it may be fighting for its own future.
The Undead Labs report is part of a larger round of uncertainty around Xbox. Several Microsoft-owned studios have been named in recent reporting about possible closures, spinouts or buyer searches, including Double Fine, Compulsion Games and Ninja Theory.
The Communications Workers of America has also criticized the reported layoff plans. CWA District 9 vice president Frank Arce said Xbox workers "will not be treated as disposable," arguing that Microsoft is choosing where the pressure lands despite the scale of its gaming business.
Microsoft has not publicly confirmed the reported Undead Labs plan. That matters. Until the company comments, the studio's future should be treated as reported rather than settled. The concern is still serious, especially because the reports describe a process where some studios may be sold, spun out or closed depending on whether buyers can be found.
If Undead Labs were closed or separated from Xbox before State of Decay 3 ships, the game would not be an easy project to move. This is not a generic zombie shooter that another team could simply polish and release.
The series has always had a very specific shape. Its best moments come from small disasters piling up: a bad supply run, a survivor getting hurt, a base stretched too thin, a vehicle breaking at exactly the wrong time. The third game is trying to expand that formula with shared-world co-op, bigger settlements, plague nests and a larger open world.
A studio change this late in development would carry obvious risk. It could slow the game down, narrow its scope, or leave another Xbox team responsible for finishing systems it did not build from the start. Even if the game is further along than the public has seen, State of Decay 3 still needs the kind of steady final stretch survival games rarely get by accident.
The bigger concern is what this says about Xbox's first-party pipeline. Microsoft spent years acquiring studios to build a broader portfolio. Now some of those same studios are reportedly trying to survive through sales, spinouts or cuts.
That creates a rough message for players. State of Decay 3 is supposed to be one of Xbox's 2027 releases. Undead Labs has finally shown more of the game. Playtests are planned to expand. The sequel is being positioned as the most ambitious entry in the series.
The studio's reported risk now sits directly against that marketing push. Microsoft can still steady this by clarifying Undead Labs' status and the future of State of Decay 3. Until then, one of Xbox's most recognizable survival games is heading toward 2027 with a question hanging over the people making it.
