Xbox pulled Obsidian Entertainment off a sequel to Avowed that was "going well" and on track for a 2027 reveal, tasking the studio instead with developing a new Fallout game, Bloomberg's Jason Schreier reported this week. The pivot cost roughly a quarter of Obsidian's workforce.
The decision is part of Xbox CEO Asha Sharma's broader "reset" of the gaming division, which includes cutting 3,200 jobs across the company and divesting five studios. Sharma wants Xbox focusing exclusively on its biggest franchises, and Fallout qualifies.
Avowed, despite positive reviews for its combat and role-playing mechanics after its 2025 launch, reportedly did not meet Microsoft's commercial expectations. A WARN notice filed in California and obtained by Game File shows 52 employees were let go from Obsidian's Irvine office. The canceled projects include an unannounced Avowed sequel and a separate Sawyer-led RPG that shared structural and thematic DNA with Fallout but wasn't part of the franchise.
Studio design director Josh Sawyer, who directed 2010's Fallout: New Vegas, will now lead development on the new Fallout title. Bethesda Game Studios is working alongside Obsidian on the project, per Bloomberg.
The Avowed sequel's cancellation stings because it wasn't struggling. Sources told Bloomberg development was progressing well and the game was on track to be announced within the next year.
It simply didn't fit Sharma's strategy. Some Obsidian employees will remain attached to the sequel in hopes it could eventually be revived, though that looks unlikely given the restructuring's direction.
Obsidian will continue supporting The Outer Worlds 2 with downloadable content and is still working on Grounded 2, co-developed with Eidos Montreal. The Fallout franchise has not seen a new mainline single-player entry since Fallout 76 launched in 2018.
The Amazon TV series, now two seasons in, reintroduced the series to tens of millions of new players and drove renewed interest in the older games. With Bethesda focused on The Elder Scrolls 6, Obsidian taking the lead on Fallout gives Xbox a dedicated team for its next flagship RPG.
Sharma has said Xbox was operating at roughly 3% margins, far below the 40%+ profitability of Microsoft's other business units. The company reported $101.8 billion in profit for the fiscal year but has seen its stock price drop 19% in 2026.
