The death of trust at Xbox may be imminent, if this latest report is to be believed.

One of the most hotly anticipated upcoming Xbox games is State of Decay 3 from Undead Labs. State of Decay is a zombie apocalypse management simulation game, where players in small teams can develop settlements, fight against zombie hordes, and scavenge for supplies. The previous games had a variety of limitations, but many of these have been eliminated in State of Decay 3, which looks incredibly promising.

Despite having trailers at the previous two showcases and a well-received alpha test which boasted thousands of sign ups, Microsoft is exploring selling off Undead Labs and potentially cancelling State of Decay 3 if it can’t find a buyer for the team. Given that State of Decay 3 is nearly finished, looks spectacular, and has had multiple trailers — this is one of the most self-immolating ideas I’ve seen of Xbox since I started reporting on it over a decade ago.

The report comes from GamesBeat, which lists studios having discussions with Xbox leadership. It coincides with information I received over the weekend. Indeed, Undead Labs could be among the studios Microsoft is looking to offload as part of its fiscal year end.

I’m told the cuts are being driven by Microsoft corporate CFO Amy Hood, who has demanded a variety of savings at Xbox to offset losses … which were also a result of her previous 30% margin demands.

Microsoft has frozen discussions with third-parties for Xbox Game Pass deals (for now), and is exploring a range of measures, which could see Double Fine, Ninja Theory, Compulsion, and others shuttered if Microsoft can’t find a buyer or pathway for them to go independent.

State of Decay 3 Official Gameplay Reveal | XBOX Games Showcase 2026 – YouTube

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Xbox’s administrative teams are working 7 day weeks to meet Microsoft’s cutbacks, potentially saving studios with sales to third-party suitors or self-funded independence ventures. But for me, we shouldn’t even be here.

At the end of the day, to run a business you need to be able to sell things. Some studios haven’t sold products in years, eventually the math catches up. At the same time, Microsoft’s gaming division had its most profitable year after in the previous fiscal, and Satya Nadella‘s compensation package was valued at almost $100 million last year.

Gaming is a risky business, and increasingly a luxury business for consumers (in part driven by the RAMpocalypse fostered by … erm, Microsoft and its AI fad.) With gaming moving further and further into discretionary spending territory, I would argue trust and culture matter more than ever. Microsoft corporate either doesn’t understand this, or perhaps more realistically, just doesn’t care.

If State of Decay 3, which is clearly nearly finished isn’t safe, how is ANYTHING safe anymore? How can you trust ANY announcement Xbox will make in the near future?

State of Decay 3 is clearly nearly finished. If that isn’t safe, how is ANYTHING safe anymore? How can you trust ANY announcement Xbox will make in the near future? How is this not indicative of a Microsoft actively trying to set up Asha Sharma and her team for failure?

State of Decay 3 received multiple trailers. Undead Labs built up a passionate fanbase across decades, and was an early pioneer building games directly with fan-led feedback over the internet.

Microsoft’s share price is imploding on fears that it missed the boat on the AI race (which let’s be real, it has). And … its response is to take an axe to one of its only businesses people actually like? Never change Microsoft. (Actually, change, change NOW.)

Are you looking forward to State of Decay 3? Let us know your thoughts on all of this in the comments.