Obsidian’s New Fallout Game Comes At The Cost Of Avowed 2

Microsoft has scrapped Obsidian Entertainment’s planned sequel to Avowed 2 and redirected the trimmed studio to a brand-new Fallout game, after laying off about a quarter of its staff on July 6 as part of Xbox’s 3,200-role restructuring. Bloomberg’s Jason Schreier reported the pivot on July 8, writing that studio design director Josh Sawyer will lead the new project with Bethesda Game Studios supporting, while Avowed 2 and several unannounced titles stay cancelled.

The pivot lands inside the biggest Xbox restructure in the division’s history. About 1,600 roles were cut on July 6 alone, four studios are leaving Xbox to new ownership, and a separate WARN filing in Texas confirmed 136 layoffs at id Software and another 22 at Bethesda Game Studios Austin. Obsidian’s new assignment, Bethesda’s calendar running through The Elder Scrolls VI, and Fallout 5 still years away explain why Microsoft pulled the trigger now.

Obsidian Lands Fallout While Losing A Quarter Of Its Staff

The news arrived in a single Bloomberg-sourced message from Schreier on Bluesky the evening of July 8, a little over 48 hours after Obsidian’s own employees learned which projects would survive the cuts. The studio design director on the new Fallout title is Josh Sawyer, the designer who directed Fallout: New Vegas when Obsidian last held the franchise in 2010. Sawyer had recently been directing a different, unannounced RPG at Obsidian that Bloomberg’s sources described as “similar structurally and thematically to Fallout” without using the Bethesda-owned name, a near-direct fit for a pivot Microsoft signalled in advance.

Demand for another Fallout is real. Amazon’s live-action Fallout series is filming its third season on the strength of its first, and the franchise’s cultural footprint has grown far beyond what Bethesda Game Studios’s own pipeline can match. Bethesda is locked into The Elder Scrolls VI, a game the studio’s leadership has publicly said will not arrive for years, which is the gap Microsoft has now asked Obsidian to fill.

Schreier reported that the strategy is “in flux” and could change, a hedge the corporate messaging so far has not echoed. Bethesda will still be involved in the new project “in some capacity,” even as it works to ship The Elder Scrolls VI. Avowed 2 and “other unannounced projects” were cancelled to clear the runway, and Obsidian was tracking to publicly reveal Avowed 2 in 2027 before the call came down.

• ~25% of Obsidian’s headcount, eliminated per a California WARN Act notice
• 60 to 70 workers, the total Obsidian layoffs per Kotaku, mostly on July 6
• 2010, the year Obsidian released its last Fallout, New Vegas
• 2027, when Obsidian was planning to announce the now-cancelled Avowed 2

Who Stayed, Who Was Cut, And Where The Studio Goes Next

The job losses hit a 23-year-old studio founded in June 2003 by ex-Black Isle employees including Feargus Urquhart and Chris Avellone, two names now familiar across the RPG genre.

Kotaku reported that the cuts removed producers, artists, designers, programmers, QA testers, and writers, including some with over a decade of seniority. The Outer Worlds 2 art director and Obsidian’s only in-house recruiter were among those let go, per LinkedIn posts reviewed by Kotaku. Looking through the posts, many of those impacted were senior talent. Most of the cuts were effective July 6 as part of Xbox’s first 1,600 layoffs, with a few more scheduled for later in the year.

What remains is a smaller studio with a tighter slate. Obsidian will keep developing early-access survival game Grounded 2 and announced DLC for The Outer Worlds 2, and a small number of staff are still maintaining minimal work on Avowed 2 in case the project is revived. Most of the rest of the company is being directed toward Fallout.

The layoffs inside Xbox go well beyond Obsidian. A Texas WARN notice filed July 8 confirmed 136 layoffs at id Software and 22 at Bethesda Game Studios Austin, with 146 of the 158 affected developers identified as CWA union members. Quality assurance was the single biggest hit at id Software, with 26 positions eliminated, per the notice. Bethesda Game Studios Austin runs live-service work on Fallout 76, the studio’s main contribution to the franchise today.

The Fallout Hole Microsoft Still Hasn’t Filled

Obsidian’s assignment is also an admission of timing. Microsoft has not shipped a numbered mainline Fallout since 2015’s Fallout 4, and the only Fallout product Bethesda Game Studios has released since then is 2018’s multiplayer Fallout 76. With Fallout 5 still years away and Bethesda’s full attention on The Elder Scrolls VI, the franchise has been carried for nearly a decade by spin-offs, the TV adaptation, and the long tail of Fallout 4.

The TV show changed the commercial math. Amazon’s Fallout series is one of the platform’s biggest original hits, and according to a Fallout TV Season 2 production ramping at New Vegas, New Vegas is set to be a focal setting of the next season, putting the franchise’s most beloved Obsidian-era location back on screen at the moment Microsoft is deciding who builds its next game. That alignment is part of why “move faster on core franchises” became Sharma’s marching order.

Sawyer’s existing project makes the pivot cheaper than it looks. Schreier reported that his unannounced RPG was already “structurally and thematically” Fallout, and Kotaku framed it as a near-direct match. The pivot does not require Obsidian to invent a new design, since the Sawyer-led project was already shaped like one.

What Sharma Told Xbox Staff On July 6

Xbox CEO Asha Sharma framed the cuts in a July 6 internal memo that Asha Sharma’s July 6 Xbox reset memo published in full, calling the moment “the most significant restructure in XBOX history” and laying out 3,200 role eliminations across fiscal 2027, of which about 1,600 were effective that same day. The remaining cuts are scheduled over the following year. “I know this is painful,” Sharma wrote. “These changes will directly affect people who have poured their creativity into building XBOX.”

Our business today is not healthy. We are operating at margins that are 3-10x lower than comparable platform and publishing businesses. We entered Gen 9 with a smaller install base and a higher cost structure. To grow, we bet on Game Pass, multi-platform, and a broader portfolio of content. While those businesses have created meaningful value, they did not grow at the pace we expected.

That is Sharma, the new Xbox CEO, in the official reset memo posted on Xbox Wire on July 6.

Four studios are leaving Xbox entirely. Double Fine Productions and Compulsion Games will return to independence with their IPs and runway, while Ninja Theory and Undead Labs have entered terms to join new ownership with funding to finish Senua’s Saga and State of Decay 3. Arkane Lyon’s management is in a Works Council consultation required under French employment law. The memo also moves Mojang and King to report directly to Sharma and installs Helen Chiang as Xbox’s first COO with end-to-end P&L responsibility.

The Avowed Sequel That Was Months From An Announcement

Avowed was always going to be the canary. The first-person RPG launched in 2025 to strong reviews but, per Kotaku, did not hit Microsoft’s internal sales expectations, a problem Obsidian studio head Feargus Urquhart had already conceded to Bloomberg earlier in the year. Avowed/Pillars of Eternity is not on Microsoft’s short list of “pillar” franchises.

Microsoft’s reported pillar-franchise list, on which Bloomberg, Kotaku, and Windows Central all agree, runs through Halo, Fallout, and The Elder Scrolls. Avowed is not on it. On July 6, the staff cuts were communicated. By July 7, Obsidian employees were told to expect a studio-wide meeting on remaining projects.

1. July 6 – Sharma announces 3,200 layoffs in internal memo; Obsidian staff cut to roughly three-quarters of prior size.
2. July 7 – Obsidian staff told to expect a studio-wide meeting on remaining projects.
3. July 8 – California WARN confirms 52 Obsidian layoffs in Irvine; Texas WARN confirms 136 id Software and 22 Bethesda Game Studios Austin cuts.
4. July 8, evening – Jason Schreier posts on Bluesky that Obsidian is cancelling Avowed 2 and beginning work on a new Fallout game led by Josh Sawyer.

Microsoft declined to comment on specifics when asked by Kotaku. Schreier’s reporting, captured in his Schreier’s Obsidian Fallout pivot post on Bluesky, notes that some staff are quietly maintaining Avowed 2’s remains in case the project is revived. What the cancellation kills, beyond Avowed 2, is a slate of other unannounced projects. Per Urquhart’s earlier Bloomberg remarks, The Outer Worlds 3 is also unlikely, while Grounded 2 and Outer Worlds 2 DLC are still moving.

What Xbox Buys, And What It Just Paid For It

The reset is also a reorganisation of where Microsoft’s dollars actually go. The company “lost 64 cents for every dollar” invested in studios over a typical year, Sharma wrote, and four of those studios are now leaving the building. The Xbox spokesperson quoted by Kotaku framed the moment as a refocus rather than a retreat: “We’re not reducing our overall investment in games. We expect to invest about the same in content as we did last year. What’s changing is where we’re investing and the kinds of projects we’re backing.”

They’re not disasters. I’m not going to say this was a kick in the teeth. It was more like: ‘That sucks. What are we learning?’

That is Feargus Urquhart, Obsidian’s studio head, on Avowed and The Outer Worlds 2 earlier in 2026 via Bloomberg. Both games took six years to ship, and the lessons Urquhart said he took from the cycle are the same lessons now arriving as a 25% headcount cut and a pivot to a franchise with a built-in audience.

Schreier’s reporting cites people familiar with the plans. Xbox has confirmed the layoff numbers and the studio divestitures, and the WARN notices are public filings. What remains open is whether Sharma’s strategy will ship faster than the previous one did. Kotaku put the bet bluntly: throwing another 1,000 bodies at Halo, Fallout, and The Elder Scrolls will not by itself fix Xbox’s release pace. Obsidian’s next Fallout is the first measurable test.

Frequently Asked Questions

What happened to Avowed 2?

Microsoft scrapped the sequel as part of the July 6 Xbox reset, according to Bloomberg’s Jason Schreier. Development had been progressing toward a 2027 reveal before the studio-wide pivot.

Who is leading the new Obsidian Fallout project?

Josh Sawyer, Obsidian’s studio design director and the director of Fallout: New Vegas in 2010. Bethesda Game Studios will support the project in some capacity, even as it stays focused on The Elder Scrolls VI.

How many people did Obsidian lay off?

A California WARN Act notice confirms 52 layoffs at Obsidian’s Irvine office. Kotaku’s reporting puts the total across the studio at around 60 to 70 workers, roughly a quarter of its pre-cut headcount.

Does the new Obsidian Fallout game replace Fallout 5?

Not directly. Bethesda is still working on The Elder Scrolls VI before turning back to Fallout 5, and Kotaku reports Fallout 5 remains nowhere in sight. Obsidian’s project is a separate new entry built with Bethesda support.

What other Xbox studios were affected by the July 2026 layoffs?

id Software lost 136 developers per a Texas WARN notice, Bethesda Game Studios Austin lost 22, and Double Fine, Compulsion Games, Ninja Theory, and Undead Labs are leaving Xbox to new ownership under Sharma’s reset memo.