Microsoft has begun work on a new Fallout game at Obsidian Entertainment, part of a broader Xbox "reset" that includes 3,200 layoffs, studio closures, and a reallocation of investment toward what the company calls "higher priority projects" The Verge. Josh Sawyer, Obsidian's studio design director, will lead the project, according to both The Verge and Bloomberg reporting published July 8, 2026.

The move ends a seven-year gap for the franchise on Xbox's own development slate. Fallout 76, released in 2018, remains the last mainline entry Xbox has shipped, despite the franchise's renewed cultural visibility following Amazon's television adaptation.

Sawyer's reassignment carries its own backstory. He had been directing an original RPG at Obsidian that Bloomberg describes as structurally and thematically similar to Fallout but not part of the franchise proper — presumably a spiritual successor now folded, in effect, into the real thing. Microsoft owns the Fallout IP outright through its 2020 acquisition of ZeniMax Media and Bethesda, giving it latitude to redirect internal talent toward the property rather than license it out.

The reset's cost at Obsidian is concrete: a sequel to Avowed, the studio's fantasy RPG released in 2025, has been canceled outright. Bloomberg reports the sequel was "going well" in development and would have been announced within the next year. Obsidian has also canceled other unspecified projects as part of the same shift. What survives is Grounded 2, currently in early access, and downloadable content for The Outer Worlds 2 The Verge.

Staffing cuts at the studio have been steep. Kotaku reports Microsoft laid off roughly 25 percent of Obsidian's workforce the week of July 8, 2026 — a figure cited by The Verge alongside its own reporting. That reduction sits inside a much larger Xbox-wide action: an initial wave of 1,600 layoffs was followed by a total commitment to 3,200 job cuts across Microsoft's fiscal year, according to Yahoo Finance, published July 7, 2026. Xbox spokesperson Delaney Simmons declined to comment on the reset, the layoffs, or the specific changes at Obsidian when approached by The Verge.

The mechanics of the reset point to a familiar tension in first-party publishing: portfolio consolidation around fewer, higher-confidence bets, executed by canceling projects mid-development rather than letting them ship and underperform. Avowed's cancellation is notable precisely because it wasn't a struggling title — Bloomberg's characterization of a sequel "going well" suggests this was a resourcing decision, not a quality judgment. Microsoft appears to be betting that a known IP with built-in demand, sharpened by television-driven awareness of the Fallout universe, carries less commercial risk than a sequel to a newer original property, however well the newer property was tracking internally.

Putting Sawyer on Fallout is not without pedigree. He was lead designer on Fallout: New Vegas at Obsidian back when the studio built that game for Bethesda under a publishing arrangement, long before Microsoft owned either company. New Vegas is still regarded by a meaningful slice of the fanbase as the series' high-water mark for writing and systemic design, which gives this assignment a symmetry that will not be lost on longtime followers of the studio.

The layoffs themselves land inside a wider pattern across the games industry, where studios owned by large platform holders have absorbed successive rounds of cuts over the past several years even as those same platforms continue shipping games at scale. Xbox's framing — a "reset" oriented toward "higher priority projects" — is standard corporate language for portfolio triage, and it leaves open exactly which other studios or titles inside the Xbox family are affected beyond Obsidian. Neither The Verge nor Bloomberg's reporting specifies additional studio-level detail beyond Obsidian at this stage.

What happens to the 25 percent of Obsidian staff who lost their jobs, and whether any land at other Microsoft studios or elsewhere in the industry, is not addressed in current reporting. Worth flagging: cancellations of already-announced, well-reviewed franchises tend to generate disproportionate community backlash relative to their commercial rationale, and Avowed had built a following since its 2025 launch. Microsoft has not detailed a release window for the new Fallout project, nor confirmed whether it will use Obsidian's existing engine work or Bethesda's Creation Engine lineage. Given Sawyer's history with the franchise, expectations among longtime players will likely form quickly regardless of how little Microsoft has said publicly so far.