Obsidian Reportedly Cancels Avowed 2 as Xbox Prioritizes New Fallout Game

Obsidian Entertainment is reportedly undergoing a major strategic reset following extensive layoffs across Microsoft’s Xbox division, with a planned sequel to Avowed cancelled as the studio redirects resources toward a new Fallout game led by Fallout: New Vegas director Josh Sawyer.

The Irvine based role playing game developer was among the Xbox studios most heavily affected by the latest restructuring. A California Worker Adjustment and Retraining Notification notice obtained by Game File confirms that 52 Obsidian employees were affected, including 43 workers connected to the studio’s California office and 9 remote employees based elsewhere in the state. Earlier industry reports estimated that the total reduction could represent approximately 25% of Obsidian’s workforce.

Despite the scale of the cuts, Obsidian is not being closed. Microsoft is instead recalibrating the studio’s production strategy as Xbox CEO Asha Sharma redirects investment toward established franchises with stronger commercial recognition. Microsoft appointed Sharma as CEO of its gaming business in February 2026, with her title later updated to CEO Xbox following the company’s gaming rebrand.

According to a new report from Bloomberg, Obsidian had been developing a sequel to Avowed, its 2025 fantasy role playing game set within the Pillars of Eternity universe. Development was reportedly progressing well, and the project could have been formally announced within the next year. However, Xbox ultimately cancelled the sequel alongside other unannounced Obsidian projects as part of its broader portfolio review.

Former Obsidian cofounder Chris Avellone had previously claimed in November 2025 that the studio was planning Avowed 2 while having no immediate plans for The Outer Worlds 3. His comments were not official confirmation at the time, but Bloomberg’s latest reporting indicates that an Avowed sequel had indeed entered development before the Xbox restructuring.

Under the revised plan, Obsidian studio design director Josh Sawyer will reportedly lead a new game within the Fallout universe. Sawyer previously directed Fallout: New Vegas, which remains one of the most celebrated entries in Bethesda’s post apocalyptic role playing franchise due to its branching narrative structure, faction system, extensive player choice, and reactive world design.

Sawyer later directed Pillars of Eternity and Pillars of Eternity II: Deadfire before moving toward the smaller and more experimental Pentiment. Prior to the Xbox reset, he was reportedly leading an original role playing game with a structure and atmosphere similar to Fallout, but which was not officially connected to the franchise. That project now appears to have been repositioned as an actual Fallout title under Microsoft’s renewed focus on its largest intellectual properties.

The project has not been officially announced by Microsoft, Bethesda, or Obsidian, and the report does not identify it as Fallout: New Vegas 2. It should therefore be viewed as a new game set within the Fallout universe rather than a confirmed direct sequel to New Vegas. Its final scope, setting, development timeline, and supported platforms also remain unknown.

Obsidian is still expected to continue supporting Grounded 2 while producing additional content for The Outer Worlds 2. A smaller internal group may also preserve some of the concepts created for Avowed 2, although the sequel is no longer part of Xbox’s active production schedule under the current plan. Microsoft declined to comment publicly on the reported project changes.

Assigning Obsidian to Fallout is one of the most commercially logical decisions available to Xbox. Fallout: New Vegas remains deeply influential within the role playing community, and Josh Sawyer’s return gives Microsoft an immediately marketable creative connection to one of the franchise’s most respected releases.

However, the circumstances surrounding that decision are difficult to separate from the human cost of the restructuring. A new Fallout game will attract substantial interest, but it is being prioritized after 52 confirmed job losses and the cancellation of multiple projects that developers had already invested time and creative energy into building.

The shift also marks a significant change in Obsidian’s recent identity. Studio leadership previously discussed the value of creating original properties and establishing a recognizable Obsidian style through games such as Avowed, The Outer Worlds, Grounded, and Pentiment. Redirecting the team toward Fallout may strengthen Xbox’s release pipeline, but it also risks transforming one of Microsoft’s most creatively versatile studios into a support mechanism for established Bethesda brands.

A similar strategy could eventually be considered for The Elder Scrolls while Bethesda Game Studios continues developing The Elder Scrolls VI. There is currently no evidence that Obsidian has been assigned an Elder Scrolls project, but Xbox’s renewed emphasis on major franchises makes parallel development across its studios increasingly plausible.

The reported Fallout project represents a significant opportunity, especially with Sawyer returning to the universe. Whether it becomes a creative successor worthy of New Vegas will depend on whether Microsoft provides Obsidian with sufficient staffing, production stability, and freedom after one of the most disruptive periods in the studio’s history.

Would you rather see Josh Sawyer and Obsidian create a new Fallout game, or should Xbox have allowed the studio to continue developing Avowed 2?