Obsidian Entertainment Cuts 25% of Staff: What It Means for The Outer Worlds and Grounded

Obsidian Entertainment has eliminated approximately 20 to 30 employees from internal project teams as part of Xbox’s sweeping organizational restructuring, though the Irvine-based studio itself remains safe from closure despite initial panic among staff. The cuts, which represent a significant portion of specific project rosters rather than studio-wide decimation, occurred amid Xbox leadership’s June 10, 2026 announcement of a “reset” that has upended the entire division. While Bloomberg’s Jason Schreier confirmed that Microsoft is retaining Obsidian—contradicting an earlier false report that the studio faced potential shutdown—the layoffs underscore the brutal efficiency measures now reshaping the publisher’s portfolio.

Studio Spared, But Projects Cancelled

Obsidian Entertainment narrowly avoided the closure discussions that briefly circled within Xbox leadership during the chaotic 24-hour period when new CEO Asha Sharma made rapid retention decisions. Insider reports revealed that the studio was discussed as a potential casualty, but Microsoft ultimately decided to keep the developer and its core team intact. This decision stands in stark contrast to other first-party studios like The Initiative, Compulsion Games, and Double Fine, which faced far grimmer fates.

However, the studio’s survival came with significant internal casualties. Obsidian cancelled a “future next-gen project”—reportedly codenamed Project North Carolina—and eliminated the team developing that title alongside staff from the South Park: The Game project. The layoffs represent a meaningful reduction in headcount, particularly for those working on experimental or early-stage initiatives that did not align with Xbox’s newly narrowed strategic focus.

The Broader Xbox Reset and Its Economics

The decision to retain Obsidian reflects Xbox’s recalibration toward what the company views as “thriving” franchises, primarily role-playing games and established intellectual properties. Obsidian’s portfolio—anchored by The Outer Worlds, Grounded, and the upcoming Avowed—positioned the studio as a keeper of core gaming content rather than an experimental venture. This distinction became critical as Xbox leadership determined which studios aligned with the new strategic direction.

The broader context reveals the scale of the reset: Xbox is cutting 3,200 jobs, representing 20 percent of the entire Xbox organization. These cuts are driven by the economics of Microsoft’s $68.7 billion Activision Blizzard acquisition, declining hardware sales, and parent company pressure to reallocate capital toward artificial intelligence initiatives. Across Microsoft divisions, approximately 9,000 additional roles face elimination, with industry estimates suggesting global layoffs could reach 11,000 to 22,000 positions.

Industry Reaction and Strategic Implications

Industry observers have drawn comparisons between the 2026 Xbox restructuring and the 2002 Electronic Arts mass closures, labeling the current moment the “Y2K EA of 2026.” The volatility of the decision-making process—where studios learned their fates within hours rather than weeks—reflects the unprecedented speed at which Asha Sharma is implementing organizational changes. Insiders noted that decisions made under previous Xbox leadership would have required months of deliberation, but the new regime is operating on an accelerated timeline.

The retention of Obsidian signals that Xbox intends to continue supporting established RPG franchises and live-service titles like Grounded, which launched in early access in 2020 and released its full version in 2022. The studio’s upcoming fantasy RPG Avowed, scheduled for 2025, remains a priority project. Conversely, the cancellation of projects like Perfect Dark, Everwild, and an unannounced Elder Scrolls Online MMO indicates that experimental or speculative ventures face swift elimination in the new environment.

A Restructuring Without Precedent in Modern Gaming

The 2026 Xbox reset represents one of the gaming industry’s most aggressive organizational purges in recent memory. The speed of decision-making, the scale of closures, and the cancellation of major AAA titles have created an atmosphere of uncertainty across the entire publisher. Obsidian’s narrow escape underscores the arbitrary nature of these determinations, where studio survival depends on executive judgment about franchise viability rather than past performance or employee tenure.

The studio’s 25-year history—including landmark titles like Fallout: New Vegas—did not guarantee protection. Instead, the forward-looking assessment of The Outer Worlds and Grounded as ongoing revenue streams proved decisive. This marks a fundamental shift in how Xbox evaluates studio portfolios, prioritizing current commercial performance and franchise momentum over legacy reputation.

What Comes Next for Obsidian and Xbox

Attention now focuses on how Obsidian will execute its remaining projects with a reduced workforce. The studio must complete Avowed while supporting the ongoing live-service demands of Grounded and managing expectations around future Outer Worlds content. The cancellation of Project North Carolina eliminates one potential source of innovation but also clarifies resource allocation toward proven franchises.

The broader Xbox portfolio will continue consolidating around franchises like Call of Duty and Candy Crush, the latter representing the publisher’s Mobile gaming cornerstone. Obsidian’s retention ensures that single-player and cooperative RPG experiences remain part of Xbox’s content strategy, even as experimental projects disappear. The studio’s next major test arrives with Avowed’s launch, where critical and commercial reception will determine whether the decision to retain the developer was justified by leadership’s new standards.