Obsidian Entertainment Status Clarified Amid Xbox Restructuring Reports
Obsidian Entertainment is not in negotiations to avoid closure, contrary to an initial report that was later retracted. A report from The Game Business on July 2, 2026, incorrectly listed the Avowed and The Outer Worlds developer among several Xbox-owned studios "in deep negotiation with Microsoft to avoid closure."
The claim was directly refuted by Bloomberg reporter Jason Schreier. Taking to Bluesky, Schreier stated, “Despite a report this morning, I can confirm that Obsidian is not in negotiations to avoid shutting down. Plenty of details are still up in the air surrounding the layoffs (picture will be clear on Monday), but Xbox is keeping Obsidian, according to people familiar with the situation.”
Obsidian's status is confirmed as active following recent industry rumors.
Following Schreier's rebuttal, The Game Business issued a correction. The publication stated in a tweet that its inclusion of Obsidian Entertainment in the list of studios negotiating to avoid closure was “a mistake.” The retraction removed Obsidian from a group that, according to the original report, included Compulsion Games, Ninja Theory, Double Fine Productions, and Undead Labs.
Internal Pressures and the Impact of Major Franchise Performance
Internal Pressures and Financial Performance Shape Xbox Studio Negotiations
The internal atmosphere at Xbox Game Studios has been described as tense and financially pressured, with the performance of major franchises reportedly influencing decisions. According to sources speaking to The Game Business, there is a perception among some teams within Xbox that they are being penalized for the underperformance of flagship titles like Call of Duty. The report suggested that even strong sales from other games, such as Obsidian's The Outer Worlds 2 and Avowed, might not have been enough to offset financial shortfalls from larger franchises.
These financial pressures are a key backdrop to the reported negotiations. Obsidian head Fergus Urquhart had previously told Bloomberg that while Grounded 2—a title co-developed with Eidos Montreal—was a "big hit," both Avowed and The Outer Worlds 2 had "disappointing results" and failed to meet sales expectations. This commercial performance reportedly led the studio to reevaluate its development processes. "The outcomes made the studio 'think a lot about how much we put into the games, how much we spend on them, how long they take,'" Urquhart was quoted as saying in the VGC report.
Avowed official art
The broader strategic shift under Xbox CEO Asha Sharma has also contributed to the reported internal strain. The Game Business report described Sharma as bringing a "start-up mentality" to the organization, demanding rapid turnarounds that contrast with established planning cycles. Furthermore, the report cited unnamed studio heads who felt leadership was "listening too much to consultants rather than the developers making the games."
Multiple sources within Xbox privately expressed skepticism about current strategy to The Game Business. One studio boss was quoted as saying, “We’re chasing a declining market with franchises that are past their prime.” This sentiment underscores the challenging financial and strategic landscape facing Xbox Game Studios as it evaluates its portfolio.
Broader Xbox Restructuring and Studios Still Under Negotiation
Avowed visual style
Broader Xbox Restructuring and Studios Still Under Negotiation
The July 6 layoffs marked the beginning of a broader, ongoing restructuring within Xbox Game Studios, with several high-profile developers reportedly still negotiating their futures with Microsoft. According to an initial report from The Game Business, studios including Ninja Theory (Hellblade), Double Fine Productions (Psychonauts), Undead Labs (State of Decay), Compulsion Games (South of Midnight), and Arkane Studios (Dishonored) were identified as being in "deep in negotiation with Microsoft to avoid closure."
The report, which cited sources within Xbox, suggested these studios and "others" were at risk of closure, spinoff, or being made independent again as part of a major strategic "reset" under Xbox CEO Asha Sharma. The cuts were positioned as a move to reallocate resources toward Microsoft's biggest franchises, with one studio head quoted anonymously saying, “We’re chasing a declining market with franchises that are past their prime.”
While Obsidian Entertainment was initially included in this list, that claim was later retracted by The Game Business as a "mistake," following a denial from Bloomberg reporter Jason Schreier. However, the status of the other named studios remains a central part of the reported negotiations. The situation underscores the significant internal pressure, with teams reportedly feeling penalized for the underperformance of major franchises like Call of Duty.
The impact of these potential closures is expected to be severe. The Game Business stated that the outcome of these negotiations would likely "reverberate across the business," affecting game cancellations, mergers, and the overall direction of Xbox's first-party portfolio. With details still emerging, the industry awaits further clarity on the fate of these studios following the initial wave of layoffs.
The Future of Avowed and The Outer Worlds 2
The future of Obsidian Entertainment's flagship RPG projects, Avowed and The Outer Worlds 2, has come under scrutiny following reports of their commercial performance. According to a report by The Game Business, studio head Fergus Urquhart stated that both titles had "disappointing results" and failed to meet sales expectations. This outcome reportedly led the studio to reevaluate its development processes. "It made us think a lot about how much we put into the games, how much we spend on them, how long they take," Urquhart was quoted as saying.
Despite these commercial concerns, Obsidian's immediate operational future appears secure after a day of conflicting reports. Bloomberg journalist Jason Schreier directly countered the initial claim that Obsidian was negotiating to avoid closure, posting on Bluesky, “Despite a report this morning, I can confirm that Obsidian is not in negotiations to avoid shutting down... Xbox is keeping Obsidian, according to people familiar with the situation.” The Game Business subsequently retracted its mention of Obsidian, calling it a "mistake."
Avowed gameplay screenshot
The long-term plans for the studio's key intellectual property remain a focal point. In a February interview, Fergus Urquhart expressed the studio's intent to "keep making games in the Avowed universe." However, the reported sales performance of the first game and the ongoing broader restructuring within Xbox introduce uncertainty to that roadmap. The status of The Outer Worlds 2 also remains under observation as part of this evaluation.
While Obsidian itself may not be facing closure, the studio's experience highlights the intense performance pressures within Xbox Game Studios. Reports indicate that even well-received titles from smaller studios are being measured against the financial might of franchises like Call of Duty, Candy Crush, and Minecraft. For players, this means the continuation of Obsidian's projects is likely, but their scale and the studio's creative direction may be influenced by a renewed emphasis on commercial returns.