Microsoft has cancelled a planned sequel to Avowed and redirected Obsidian Entertainment toward development of a new Fallout game, according to Bloomberg, as reported by Engadget. The Avowed sequel was one of several Obsidian projects cancelled in the shift, Bloomberg reported. Josh Sawyer, director of Fallout: New Vegas and Pentiment, is reportedly leading the new Fallout title.

The restructuring comes with layoffs. Bloomberg reported Obsidian is cutting roughly a quarter of its workforce. Game File, citing WARN Act layoff notices, put a finer point on the number: 52 employees, split between 43 in-office staff in Irvine, California, and 9 in-state remote workers. Game File separately reported that id Software, another Microsoft-owned studio, is laying off more than 90 people — about half its staff.

Microsoft acquired Obsidian in 2018 as part of its broader push to build out first-party Xbox studios. The cuts at Obsidian and id are taking place under new Xbox CEO Asha Sharma, and follow a Bloomberg report from July 6, 2026 that Microsoft intends to concentrate its internal studios around a narrower set of proven franchises, including The Elder Scrolls, Doom, Wolfenstein, and Fallout. That earlier report also detailed plans to cut 3,200 jobs and divest five studios as part of a wider Xbox overhaul.

Avowed launched to a generally positive reception and had been receiving active post-launch support. Xbox Wire announced a substantial anniversary update on February 17, 2026, adding Photo Mode, a new weapon type, and quality-of-life changes, alongside a PlayStation 5 release — notable given Avowed's origins as an Xbox and PC exclusive. Obsidian shipped Patch 2.1 in March 2026 with bug fixes and a community-requested feature. But the studio's own roadmap, updated in December 2025, had already signaled a slowdown, stating plainly that the game would not receive a fall content update. Taken together, the sequence — anniversary update, patch, then a roadmap admission of no further seasonal content — reads in hindsight as the tail end of Avowed's support cycle rather than a pause before a sequel.

The pivot to Fallout is not a cold start for Obsidian. The studio built Fallout: New Vegas in 2010 under license from Bethesda, and it remains one of the most well-regarded entries in the franchise among longtime fans, in part because of the design choices Sawyer himself championed — faction-driven reputation systems, harder difficulty options, and a less binary approach to morality than some later entries. Handing him the new Fallout project reads as Microsoft leaning on institutional memory and an existing fan constituency rather than building goodwill from scratch, though the company has not detailed how this new game relates structurally to Bethesda's own Fallout stewardship.

The broader context here is a consolidation strategy that Microsoft has been signaling since at least early July: fewer franchises, deeper investment in each, and less tolerance for original IP that doesn't hit commercial thresholds quickly. Avowed was Obsidian's first major original fantasy franchise in years, and its cancellation as a sequel prospect — even as the base game continued receiving updates as recently as March — suggests the calculus at Xbox has shifted toward franchise reliability over incubating new worlds.

Worth flagging: layoffs of this scale at studios that were, by all outward appearances, actively supporting shipped and reasonably well-received products complicate the usual narrative that cuts follow failure. Avowed's PS5 port and anniversary update in February suggest a title Microsoft was still willing to invest marketing and engineering resources into as recently as five months before its sequel was cancelled. That gap between visible product support and internal restructuring is not unusual in an industry where greenlighting decisions and live-service roadmaps operate on different timelines than corporate reorganization, but it does mean external signals of a game's health are an increasingly unreliable predictor of a studio's near-term staffing.

For Obsidian specifically, the move back to Fallout ends any near-term prospect of the studio operating two major concurrent franchises. Whether that consolidation ultimately serves players well depends on execution neither Bloomberg nor Engadget's reporting yet addresses: budget, timeline, and how much creative latitude Sawyer's team retains under a Fallout license Bethesda still oversees at the corporate level. Microsoft has not issued its own public statement addressing the specifics beyond what Bloomberg's sourcing describes, and Obsidian's official channels had not, as of this writing, posted anything superseding the Bloomberg account.