Microsoft has cancelled a planned sequel to Avowed and is redirecting Obsidian Entertainment, the studio that made the original game, to develop a new Fallout game instead, according to Bloomberg. As a result, Obsidian is laying off roughly a quarter of its employees—52 people in total, based on official layoff notices reviewed by Game File.

Josh Sawyer, who directed the well-liked Fallout: New Vegas game from 2010, is leading the new Fallout project. Microsoft bought Obsidian in 2018 to build up its in-house game studios. The layoffs are happening under new Xbox CEO Asha Sharma and follow a broader company plan announced in early July to focus investment on a smaller number of established franchises like Fallout, Doom, and The Elder Scrolls, rather than developing new ones.

Avowed came out in February 2025 and was generally well-received by players and critics. Microsoft continued to update and support the game—it added new features in February 2026 and released a patch in March 2026. The company even brought the game to PlayStation 5, even though it originally launched only on Xbox and PC. By December 2025, though, the studio's own roadmap signaled the game would not receive new seasonal content. Looking back, the pattern of updates followed by a roadmap announcement of no future content suggests the game's support period was winding down.

Obsidian has worked with the Fallout franchise before. In 2010, the studio made Fallout: New Vegas under a licensing deal with Bethesda, and many longtime Fallout fans still regard it as one of the best games in the series. Sawyer's design choices—like reputation systems based on joining different factions and harder difficulty options—made New Vegas stand out. Microsoft appears to be choosing to work with experienced developers and tapping into existing fan loyalty rather than building a brand-new world from scratch, though the company has not explained exactly how this new game will fit into Bethesda's larger Fallout plans.

This cancellation is part of a larger Microsoft strategy: focus on fewer franchises, invest more heavily in each one, and be less willing to take risks on brand-new games if they don't make money quickly. Avowed was Obsidian's first major original fantasy series in many years, and cancelling its sequel—while the original game was still being updated—shows that Xbox has shifted away from trying to build new game worlds and toward relying on familiar ones.

What makes these layoffs notable is that they happened at studios that looked like they were doing fine. Avowed was receiving updates and even a PlayStation release just five months before the sequel was cancelled. When game studios lay off workers, it often comes after a game has flopped—but that is not what happened here. This reflects a broader pattern in the video game industry: a company's decision to cancel or downsize a game project and a studio's staffing levels operate on completely different schedules, so what you see players getting as updates does not always tell you what is happening behind the scenes.

For Obsidian, the shift to Fallout means the studio will no longer be working on two major franchises at the same time. Whether this ends up being good or bad for players depends on things we do not yet know: how much money Microsoft will spend on the new Fallout game, how long development will take, and whether Sawyer's team will have the freedom to make their own creative choices or will have to follow strict rules from Bethesda, which owns the Fallout license at the top level. Microsoft has not publicly explained any of these details.