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

The restructuring includes significant layoffs. Obsidian is cutting roughly a quarter of its workforce—52 employees in total, according to WARN Act notices reviewed by Game File. The cuts split between 43 in-office staff in Irvine, California, and 9 remote workers. Separately, id Software, another Microsoft studio, is laying off more than 90 people, roughly half its staff.

Microsoft acquired Obsidian in 2018 to expand its first-party studio portfolio. These cuts occur under new Xbox CEO Asha Sharma, following a July 6 Bloomberg report detailing Microsoft's plan to concentrate internal studios around a smaller set of proven franchises—The Elder Scrolls, Doom, Wolfenstein, and Fallout. That report also outlined plans to cut 3,200 jobs and divest five studios.

Avowed launched to positive reviews and had been actively supported since release. Xbox Wire announced a substantial anniversary update on February 17, 2026, adding Photo Mode, a new weapon type, and quality-of-life improvements, alongside a PlayStation 5 release—significant because Avowed originally launched as Xbox and PC exclusive. Obsidian shipped Patch 2.1 in March 2026 with bug fixes and community-requested features. The studio's roadmap, updated in December 2025, had signaled a slowdown, stating the game would not receive a fall content update. The sequence—anniversary update, patch, then a roadmap acknowledgment of no further seasonal content—suggests in hindsight that Avowed's support cycle was concluding rather than pausing.

The pivot to Fallout is not unfamiliar territory for Obsidian. The studio developed Fallout: New Vegas in 2010 under license from Bethesda, and it remains among the most respected entries in the franchise with longtime fans. New Vegas succeeded in part because of design choices Sawyer championed—faction-based reputation systems, harder difficulty modes, and a less binary moral framework than some later entries. Assigning Sawyer to lead this new Fallout project suggests Microsoft is leveraging existing institutional knowledge and fan goodwill rather than building a new world from the ground up, though the company has not detailed how this game relates structurally to Bethesda's own Fallout direction.

The larger picture is a consolidation strategy Microsoft has signaled since early July: fewer franchises, deeper investment per franchise, and lower tolerance for original IP that doesn't reach commercial targets quickly. Avowed was Obsidian's first major original fantasy franchise in years. Its cancellation as a sequel prospect—even as the base game received updates as recently as March—suggests Xbox's priorities have shifted toward franchise reliability over nurturing new intellectual property.

The timing of these layoffs warrants attention. Cuts of this scale at studios that appeared to be actively supporting shipped and well-received products complicate the conventional story that reductions follow game failures. Avowed's PS5 release and anniversary update in February indicate Microsoft was still investing marketing and engineering resources five months before cancelling the sequel. That gap between visible product support and internal restructuring is not unusual in an industry where greenlight decisions operate on different timelines than corporate reorganization, but it does mean external signals of a game's health have become a less reliable guide to a studio's near-term staffing plans.

For Obsidian, the return to Fallout eliminates near-term prospects of running two major franchises concurrently. Whether this consolidation serves players well depends on factors Bloomberg and Engadget reporting has not yet addressed: allocated budget, development timeline, and how much creative control Sawyer's team retains under a Fallout license that Bethesda still oversees at the corporate level. Microsoft has issued no public statement beyond what Bloomberg's reporting describes, and Obsidian's official channels had not posted anything superseding the Bloomberg account as of this writing.