Obsidian Loses a Quarter of Its Staff as the Xbox Reset Hits the Studios

Obsidian sheds 60 to 70 people in the Xbox reset, and a funded indie studio trims staff right after a hit Steam demo.

July 2026 so far (through July 7), newly announced cuts with disclosed numbers: about 4,835 people across 2 companies, Microsoft (4,800, announced July 6) and Yield Guild Games (35, announced July 6). Red Rover Interactive is cutting an undisclosed number (announced July 3). Two WARN filings took effect this week for cuts first announced back in May: Streamland Media (71, Los Angeles) and Amazon (57, Washington state). For running context, tech employers announced 139,156 U.S. job cuts through the first half of 2026, up 83% from the same period last year, per Challenger, Gray & Christmas.

Obsidian: a quarter of the studio gone

Obsidian Entertainment, the studio behind The Outer Worlds, Pentiment, Avowed, and Grounded, is losing about 60 to 70 employees, roughly a quarter of its staff, in the Xbox reset, Kotaku reports (noted by Game Developer on July 7). The cuts land across all departments. Some are immediate, and some affected staff have been told they will be part of Xbox's second wave of 1,600 departures spread over the next year.

The people hit include senior, long-tenured talent. Kotaku notes that the art director on The Outer Worlds and the studio's only recruiter were among those laid off, and that LinkedIn posts show many of the impacted had over a decade at Obsidian. Work on the early-access title Grounded 2 and previously announced DLC for The Outer Worlds 2 is still in production, but there is considerable uncertainty outside those projects, and an all-staff meeting was reportedly planned.

These 60 to 70 cuts are a subset of the 3,200 Xbox roles being eliminated (1,600 now, 1,600 through fiscal year 2027), not a separate Microsoft reduction, so they do not add to the month tally. Obsidian is also not one of the four studios being spun out; it is staying inside Xbox and being shrunk.

The stated reason, from Xbox CEO Asha Sharma's memo, is that the business is "not healthy," operating at margins 3 to 10 times lower than comparable platform and publishing businesses, after bets on Game Pass, multiplatform, and a broader content portfolio did not grow as expected, against the most severe hardware crisis in the industry's history. The plausible real mechanism is years of aggressive acquisition-driven expansion (ZeniMax, Activision Blizzard) meeting a stalled console install base and AI-era cost discipline, with management layers being compressed from as many as 14 down to three to five and vendor spend cut by half. Severance specifics for Obsidian staff were not reported; Microsoft has said affected employees get financial support and career resources, and that it redeployed more than 4,000 employees into new roles over the past year, including 500 this month.

Red Rover Interactive trims staff after a Steam Next Fest hit

Red Rover Interactive, the Oslo and Newcastle studio building the survival shooter Enginefall, is cutting an undisclosed number of employees across both offices, the studio confirmed to Game Developer on July 3. The cuts arrive just after a strong Steam Next Fest showing in June, where Enginefall drew positive press and crossed 300,000 Steam wishlists. Red Rover called it a restructuring to place the company on "a more sustainable footing" for the next phase of development, and said it is working with a specialist recruiter to help departing staff find new roles. This Week in Videogames identified at least six LinkedIn posts from affected developers.

Red Rover has raised about $20 million since forming in 2023, including a $15 million round led by PUBG maker Krafton in 2024. Per the Norwegian outlet Gamer.no, the studio had roughly 15 people in Oslo and 22 in Newcastle before the cuts, and was profitable in 2023, 2024, and 2025, with 19.1 million kroner in 2025 revenue and a 1.3 million kroner profit. The stated reason is burn-rate discipline ahead of launch. The plausible mechanism is a funded indie that over-hired against an ambitious online shooter and is now tightening before the expensive post-launch support window, possibly with investor pressure to conserve cash. Enginefall is still slated for 2026 and development continues, though the studio has not said how the cuts affect the release window. The number of layoffs was not disclosed, so this one sits outside the running tally.

Tracking: Microsoft's July 6 reset

One day on, the edges of Monday's Microsoft cut are still sharpening. Four studios are exiting Xbox (Compulsion Games and Double Fine returning to independence; Ninja Theory and Undead Labs joining new owners), and Arkane Lyon is in legally required consultation in France, with the already-delayed Marvel's Blade reportedly at risk. The company-wide number is 4,800 now, about 2.1% of staff, out of a planned 6,400 total. Microsoft's chief people officer, Amy Coleman, has said the eliminated roles are "not being replaced by AI," even as she acknowledged AI is changing how work gets done.

What to watch

The second wave of 1,600 Xbox cuts is paced across fiscal year 2027, so the Obsidian-style studio-level fallout will keep dripping out rather than landing in one batch. Watch the studios not yet named in the spin-off list, and watch whether Arkane Lyon's consultation ends in closure, which would put Marvel's Blade in jeopardy. On the indie side, Red Rover is a useful template for a pattern that may repeat: a well-funded studio cutting after a marketing win, not a failure, because the cost curve of an online shooter runs through launch and into post-release support.