Key takeaways
- Undead Labs secured independence from Microsoft through a management buyout but laid off approximately 40 developers during the transition.
- Studio head Philip Holt confirmed State of Decay 3 remains in active development on schedule despite the personnel reduction.
- The studio retained its IP and received runway funding from Microsoft, and has secured a new external publisher for the game.
- FX director John Gronquist, who worked at Undead Labs for 15 years, was among those laid off but praised the studio's handling of the process.
Undead Labs achieved independence from Microsoft through a management buyout, becoming an independent, employee-owned studio. The separation included intellectual property ownership, back catalogs, and runway funding to support development. However, the transition came with significant personnel reductions, with sources reporting that approximately 40 developers were laid off. Despite this, studio head Philip Holt stated that the layoffs would not impact State of Decay 3’s development schedule, though the cuts underscore the financial pressures of achieving independence in the current industry environment.
The Path to Independence
Escaping Microsoft’s Gaming Consolidation
Undead Labs was among the smaller studios that Microsoft chose to divest as part of its broader gaming division restructuring. Rather than face closure or integration into another publisher, the studio executed a management buyout and became an independent, employee-owned company. The separation included the intellectual property, back catalogs, and runway funding that Microsoft provided to divested studios, enabling Undead Labs to maintain complete ownership of the State of Decay franchise and its existing library.
This outcome positioned Undead Labs more favorably than many studios affected by the industry’s consolidation wave. Microsoft had announced simultaneous decisions including the shift of the Halo franchise from 343 Industries to Activision, while other studios faced closure entirely. Undead Labs’ ability to retain independence and franchise ownership represented a relatively positive resolution compared to the broader industry backdrop. The specific financial terms of the deal were not disclosed publicly, but the inclusion of runway funding indicated a multi-year commitment from Microsoft rather than a simple asset transfer.
The Personnel Reduction
The announcement of independence came paired with a significant reduction in headcount. Undead Labs issued a public statement acknowledging that it was “saying goodbye to a significant number of our colleagues” without disclosing exact figures. Sources speaking with Kotaku reported that the layoffs affected approximately 40 developers, representing a substantial reduction for a studio of Undead Labs’ size.
Undead Labs declined to officially confirm or dispute the 40-person figure when approached for comment, a pattern consistent with industry practice where studios often avoid precise public disclosure of layoff numbers. The timing of the layoffs, occurring simultaneously with the independence announcement, suggests the restructuring was planned as part of the transition away from Microsoft’s corporate structure rather than an unexpected consequence of the separation. The reduction raises practical questions about the adequacy of the runway funding provided in the management buyout and the studio’s financial runway under independent operations.
State of Decay 3: Development and Timeline
Maintaining Development Velocity
Philip Holt, Undead Labs’ studio head, provided explicit assurance that development remained unaffected by the personnel changes. “State of Decay 3 remains in active development, and these changes will not impact the game’s launch,” Holt told IGN. “The team is continuing its work on schedule, and we remain committed to delivering the experience our community has been waiting for.” His statement directly addresses community concerns that significant layoffs could introduce delays to the long-awaited sequel.
Holt’s language suggests the remaining development team is sufficient to maintain the established timeline, or that the layoffs targeted positions deemed non-essential to the game’s current scope and design. The explicit commitment to maintaining schedule signals confidence in the post-layoff structure, though only the game’s eventual release will confirm whether that confidence was justified.
Years in Development
State of Decay 3 was first announced at Xbox’s 2020 summer gaming showcase, marking over six years in development by the time of the independence announcement. The project’s journey has been marked by visible challenges throughout its creation, with the original announcement consisting of promotional material rather than functional gameplay footage. Extended development cycles have become routine for ambitious open-world titles in recent years, though the lack of concrete gameplay reveals has left State of Decay 3 in relative obscurity within broader industry conversation.
The delay has given the zombie survival game market time to evolve considerably. Numerous titles have entered and established themselves in the genre since 2020, shifting both player expectations and competitive landscape. State of Decay 3’s eventual release will arrive into a market environment substantially different from the one that existed when the project was first teased.
Business Structure and Publishing
The studio has secured an external publisher for State of Decay 3 following the separation from Microsoft, though the publisher’s identity has not been publicly announced. This arrangement allows Undead Labs to retain creative control and intellectual property ownership while leveraging the publisher’s resources for marketing, distribution, and potentially additional capital. The runway funding provided by Microsoft as part of the separation functions as a bridge to sustain development through completion and launch, with the publisher likely providing additional support and certainty around distribution channels.
Developer Reactions and the Human Cost
John Gronquist, who served as Undead Labs’ FX director, was among those included in the layoffs. Gronquist, who had been at the studio since its founding 15 years prior, posted about his departure on LinkedIn. His statement offered perspective on how the transition was conducted internally: “The company and leadership have gone above and beyond to be transparent and treat the process with humanity and respect that is rare in this industry, and I leave with no regrets other than not being there with them at the finish line to ship State of Decay 3.”
Gronquist’s public characterization of the layoff process as transparent and respectful provides a counterpoint to the difficulty of the situation itself. While he expressed genuine disappointment at not seeing the project through to completion after 15 years with the studio, his assessment suggests leadership attempted to manage the transition thoughtfully. The involvement of a senior staff member with 15 years of tenure in the reductions underscores the scope and scale of the layoffs across the organization.
Timeline to Testing and Beyond
The studio has committed to a closed beta test for State of Decay 3 as early as the end of 2026, marking the first concrete gameplay milestone the studio has publicly attached to the project. This represents advancement beyond the vague development updates that have characterized previous communications and suggests the game has progressed sufficiently to move toward player testing.
The extended development timeline means State of Decay 3 will enter a substantially different market landscape than existed at its 2020 announcement. Whether that additional time results in a more polished, feature-complete game that justifies the delay, or whether industry shifts have moved past what the game offers, will become clear only upon its eventual release.
Frequently Asked Questions
How many developers did Undead Labs lay off?
Undead Labs did not officially confirm the number, but sources reported approximately 40 developers were laid off during the transition.
Will the layoffs delay State of Decay 3?
No. Studio head Philip Holt stated that State of Decay 3 remains in active development on schedule and the layoffs will not impact the game's launch.
What did Undead Labs receive from Microsoft in the separation?
The studio received its intellectual property, back catalogs, and runway funding to support ongoing development while remaining independent and employee-owned.
