Obsidian Cancels Avowed 2 as Fallout Project Takes Priority, Cuts 25% of Staff

Obsidian Entertainment has cancelled the planned Avowed 2 in order to develop a new Fallout game, resulting in significant layoffs that affect around a quarter of its staff, according to a Bloomberg report published on 8 July 2026.

Obsidian, the acclaimed Xbox studio acquired by Microsoft in 2018, has shifted its development focus from an Avowed sequel to a new title in the Fallout franchise. Design director Josh Sawyer, previously tasked with leading a separate role-playing game described as ‘similar structurally and thematically’ to Fallout, will now oversee the newly prioritised Fallout project, Bloomberg reported. The decision reflects a broader strategic reset at Xbox under CEO Asha Sharma, who is steering resources toward consolidating and expanding its most lucrative franchises.

Strategic Shift Sparks Layoffs and Franchise Realignment

According to Bloomberg, Avowed 2 had been progressing smoothly and was on track for a reveal within the next year. Insiders cited by the outlet state that the project ‘did not fit with Xbox CEO’s Asha Sharma’s new strategy,’ leading to its cancellation. In alignment with a parent-company directive to double down on flagship series, Obsidian joins a group of Xbox studios experiencing substantial staff reductions. A WARN notice in California, verified by Game File, clarifies that Obsidian will lose 52 employees this week, comprising 43 at its California headquarters and 9 remote California workers—amounting to roughly 25% of the studio’s total workforce.

Bloomberg’s coverage corroborates that Obsidian is not the only Xbox development house impacted, as ‘thousands of workers’ across Microsoft’s gaming division face redundancies. Just days prior, reports surfaced that Id Software’s coding team was also heavily affected by layoffs. This consolidation is widely seen as an attempt to better capitalise on the most popular intellectual properties under the Xbox and Bethesda umbrellas.

Obsidian’s Portfolio and Franchise Performance

Obsidian released three titles in 2025: Avowed, The Outer Worlds 2, and Grounded 2. Despite high expectations, only Grounded 2 achieved significant success. Studio head Fergus Urquhart said in a Bloomberg interview earlier this year that Grounded 2 was ‘a big hit’ for the company. By contrast, both Avowed and The Outer Worlds 2 ‘did not meet sales expectations.’ As reported by Bloomberg, Obsidian plans to continue supporting The Outer Worlds 2 and Grounded 2 with ongoing content, but is shelving future Avowed projects in favour of Fallout.

Bethesda Softworks, also owned by Xbox, retains stewardship of the Fallout franchise but has not released a new mainline Fallout or Elder Scrolls title in over a decade. The franchise recently saw renewed cultural resonance thanks to the successful Fallout show on Amazon Prime, which has fuelled further public and executive interest in expediting a new game entry.

In an internal studio communication this week, Bethesda’s head of studios Jill Braff described a company-wide restructuring initiative, stating: ‘To best position Bethesda for future growth, we are shifting from a planning model primarily centered on what’s next for each independent studio to one that focuses on our strongest franchises and determining the content roadmap that best serves our players and Bethesda as a whole.’ This message underpins the rationale for realigning resources and talent toward Fallout and other big-name series.

Key Facts and Industry Impact

• Obsidian Entertainment has cancelled Avowed 2 to focus on a new Fallout game, per a 2026 Bloomberg report.
• Approximately 25% of Obsidian’s staff—52 employees—will be laid off, including 43 based at its Irvine, California headquarters and 9 remote workers.
• Josh Sawyer, previously the project’s design director, will lead the new Fallout game.
• Grounded 2 was confirmed as a ‘big hit’ in early 2026, whereas Avowed and The Outer Worlds 2 underperformed in sales.
• Bethesda has not released a new mainline Fallout or Elder Scrolls title in over ten years.

The reallocation of Obsidian’s leadership and staffing resources toward Fallout signals a decisive shift in Xbox’s approach: prioritising proven brands to compete in an evolving games market. Both human players and industry analysts will be watching for further updates as Obsidian refocuses, and as the Fallout franchise prepares for its biggest return in over a decade.