Undead Labs Leaves Xbox and Becomes Employee Owned as State of Decay 3 Stays on Game Pass
Undead Labs has officially completed its separation from Xbox and is now operating as an independent, employee owned game development studio, ending nearly 8 years under Microsoft while keeping State of Decay 3 on its existing path. The studio confirmed that the game remains in active development, is currently in alpha, and is targeting closed beta testing before the end of 2026. Its previously announced 2027 release remains unchanged across Xbox Series X|S, PC, and PlayStation 5, with a Day One Game Pass launch still planned.
The transition completes a process Microsoft first revealed during its wider Xbox restructuring, when Undead Labs was described as moving toward new ownership with funding in place to continue State of Decay 3. The new Undead Labs announcement confirms that the developer has instead emerged as an employee owned independent company rather than joining another gaming group. Xbox separately confirmed that the studio transitioned on terms similar to Compulsion Games and Double Fine and that a new publisher will release State of Decay 3 while preserving its Day One Game Pass commitment. That publishing partner has not yet been identified.
"State of Decay exists because millions of players have made that choice over the years, and we’re dedicated to honoring their trust."
— Quote by: Philip Holt
The move closes another chapter in a relationship between Undead Labs and Microsoft stretching back more than 15 years. The original State of Decay launched in partnership with Microsoft in 2013 before the company acquired Undead Labs in 2018. Holt thanked Xbox for what the partnership made possible and emphasized that Microsoft had been part of the franchise from the beginning. What changes now is ownership and management rather than the immediate direction of State of Decay, with Undead Labs retaining control of its studio while continuing development of the next game.
Players can still register through the State of Decay 3 playtest page for opportunities to participate in future testing. The studio has previously detailed a larger world, untethered multiplayer, expanded community systems, and changes to combat, weather, lighting, and permadeath, but the independence announcement itself is primarily about who controls Undead Labs going forward rather than another gameplay reveal.
The separation is part of Microsoft's much larger restructuring of Xbox. Compulsion Games and Double Fine have already returned to management ownership with their intellectual property, back catalogs, and runway funding, while Undead Labs has now completed a similar transition. At the same time, Microsoft's remaining internal organization is becoming more consolidated, with Activision expanding its responsibilities, Bethesda taking oversight of Obsidian, and Playground Games and Turn 10 being combined into a single studio.
Undead Labs becoming independent is more significant than simply changing the corporate logo above the studio. Employee ownership gives the development team a direct stake in what happens next, while retaining State of Decay means the company leaves Microsoft with an established franchise rather than having to rebuild around a new property.
The unanswered question is publishing. Microsoft has confirmed that State of Decay 3 has a new publisher, but neither Xbox nor Undead Labs has named that company. Whoever takes that role will influence marketing, distribution, and potentially the franchise's longer term direction. For now, however, the separation appears structured to avoid disrupting the game itself, with its 2027 release and Game Pass commitment remaining intact.
Do you think becoming employee owned will give Undead Labs more freedom to shape State of Decay, or was Microsoft's backing more valuable for the franchise?
