Obsidian Entertainment Not Facing Closure Amid Xbox Studio Restructuring, Despite Initial Reports

Obsidian Entertainment, developer of Avowed and The Outer Worlds, is not at risk of closure according to multiple sources including Bloomberg’s Jason Schreier, despite initial reports suggesting the studio was negotiating with Microsoft to remain open. Xbox is proceeding with significant layoffs and possible closures for other studios, but Obsidian will remain part of Xbox’s first-party roster.

On 2 July 2026, claims circulated from The Game Business reporting that Obsidian Entertainment, the Xbox-owned studio behind Avowed and The Outer Worlds, was “deep in negotiation with Microsoft to avoid closure,” grouping Obsidian with other at-risk studios such as Compulsion, Ninja Theory, Double Fine, and Undead Labs. However, later the same day, Bloomberg‘s Jason Schreier contradicted these reports, stating on Bluesky: “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.”

Erroneous Reports Retracted; Studio Not for Sale

By 5:25 pm on July 2, The Game Business officially retracted references to Obsidian in its initial story, labelling the inclusion as “a mistake.” The initial article mistakenly stated: “Studios such as Compulsion, Ninja Theory, Double Fine, Obsidian, Undead Labs and others are deep in negotiation with Microsoft to avoid closure. The impact of this will likely reverberate across the business.” The update now clarifies that Obsidian is not included in any ongoing closure negotiations with Microsoft.

Currently, there is no concrete evidence to suggest that Obsidian is up for sale or facing shutdown in the 2026 Xbox studio restructuring. Schreier’s direct quote—“Obsidian is not in negotiations to avoid shutting down. Xbox is keeping Obsidian, according to people familiar with the situation”—remains the definitive public stance based on credible sources.

Studio Performance and Microsoft’s Broader Restructuring

The confusion over Obsidian’s fate comes during a period of major upheaval for Microsoft’s Xbox division. Microsoft is planning significant job losses across its gaming business in July 2026, under a reorganisation led by CEO Asha Sharma. Structured layoffs are expected to commence the week of July 6, 2026, and according to media outlets, may include studio closures, spinoffs, mergers, and cancelled games for several subsidiaries.

The following Xbox Game Studios are reportedly under review for potential closures or sales:

• Compulsion Games – Known for ‘South of Midnight’.
• Double Fine – Known for ‘Kiln’ and the ‘Psychonauts’ series.
• Ninja Theory – Developer of ‘Hellblade’.
• Undead Labs – Developers of ‘State of Decay’.
• Arkane Studios – Best known for the ‘Dishonored’ series, potentially facing closure if not sold.

Obsidian, however, has been definitively excluded from this at-risk list as of July 2, 2026, reconfirmed by Bloomberg’s industry sources.

Earlier this year, Obsidian’s CEO Fergus Urquhart commented to Bloomberg about recent sales figures, stating that while ‘Grounded 2’—co-developed with Eidos Montreal—was “a big hit,” both ‘Avowed’ and ‘The Outer Worlds 2’ delivered “disappointing results.” Urquhart was quoted: “The results of each game made the studio think a lot about how much we put into the games, how much we spend on them, how long they take.” He also confirmed plans to “keep making games in the Avowed universe,” though it is now unclear how these plans may evolve following internal reviews.

Obsidian shipped ‘The Outer Worlds 2’ in 2025, but recent internal feedback suggested it and ‘Avowed’ did not meet commercial expectations. As reported four months prior, Obsidian is not initiating development on ‘The Outer Worlds 3’, but intended to continue with projects in the ‘Avowed’ IP.

Summary: Xbox 2026 Studio Restructuring and Obsidian’s Status

• Date of Layoffs Commencing: Week of July 6, 2026
• Xbox Studios Reported at Risk: Compulsion Games, Double Fine, Ninja Theory, Undead Labs, Arkane Studios
• Obsidian Status: Not at risk of closure or sale; remains with Microsoft
• Recent Obsidian Sales: ‘Grounded 2’ called “a big hit”, ‘Avowed’ and ‘The Outer Worlds 2’ considered “disappointing”
• Upcoming Decisions: Detailed future staffing and project plans expected after July 6, 2026

Relevant Direct Quotes:

• Jason Schreier: “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.”
• Fergus Urquhart: “The results of each game made the studio think a lot about how much we put into the games, how much we spend on them, how long they take.”
• Original (Retracted) Game Business Statement: “Studios such as Compulsion, Ninja Theory, Double Fine, Obsidian, Undead Labs and others are deep in negotiation with Microsoft to avoid closure, The impact of this will likely reverberate across the business.”

While Obsidian will continue operating as part of Xbox Game Studios, the fate of several other Microsoft-owned studios remains uncertain, with closure, merger, or sale all possible outcomes as part of the 2026 restructuring. The full impact of this corporate reset will be clarified in the weeks following the start of layoffs.