State of Decay 3 Dev Goes Indie: Why Undead Labs Left Xbox

Ever wonder why State of Decay 3 was announced way back in 2020, even though it's still not out? Turns out, it was a strategic move by Undead Labs to stay on Microsoft's radar during their acquisition spree.

In a chat with The Game Business, studio boss Philip Holt explained that the early announcement was like putting a marker on the table. "I didn't think Microsoft was done being acquisitive, and I didn't think they'd continue buying small developers; I assumed they'd start buying big things," he said. "I was a little worried about getting swallowed up or divested before we had a chance to present to the world what we were working on." So they dropped a trailer to show everyone what they were building.

Now, Undead Labs is an independent, employee-owned studio after leaving Xbox Game Studios. This exit comes amid the "Xbox reset" that has seen layoffs across Microsoft's gaming division in 2026. Undead Labs also had to cut staff as it entered this new era, but Holt says nothing went wrong behind the scenes. "It was an accelerated period of time for Microsoft's divestiture," he explained. "We had a lot of interest. I also thought that because we were so close to being in revenue, the amount of capital that we needed to finish [State of Decay 3] was not an insurmountable amount that we couldn't go raise it ourselves." So he submitted an offer for a management-led acquisition, and Microsoft agreed.

During its eight years under Xbox, Undead Labs never released a new game, but they did drop 38 updates for State of Decay 2. A small team had been working on State of Decay 3 since 2020, with development picking up a few years later. Despite going indie, State of Decay 3 will still launch day-one through Game Pass. Holt credited the subscription service with helping the horror franchise reach 25 million players.

As an independent studio, Undead Labs can focus on serving its audience and being profitable. "We need to make a profit, we need to be sustainable, we need to pay ourselves and our partners--and it is a goal. This is not a charity. But it's not the number-one most important objective," Holt said.

Undead Labs joins Double Fine and Compulsion Games as former Xbox studios, but the future of Ninja Theory (Hellblade, DmC: Devil May Cry) looks grim. After acquisition deals fell through, it seems the studio will soon be shut down.

So, what do you think about Undead Labs going independent? Will you be picking up State of Decay 3 when it finally launches? Let us know in the comments!