State of Decay 3 escapes Xbox and Game Pass obligations as Undead Labs finds new owner

Undead Labs is leaving Microsoft after eight years as an Xbox studio — and State of Decay 3 is coming with it. Xbox CEO Asha Sharma confirmed the studio has entered terms with a new, still-unnamed owner, with funding secured to complete the game. The identity of that owner is expected to be revealed later this summer, according to Game File.

Critically, the deal carries no Xbox-controlling terms, meaning State of Decay 3 is not obligated to launch on Game Pass — or appear there at all. That's a notable shift: State of Decay 2 launched day one on Game Pass back in 2018, and the sequel has been anticipated by subscribers since its announcement in August 2020. Undead Labs has also confirmed the game is still in development and targeting PS5 alongside other platforms, marking a clean break from its Xbox exclusivity era. The studio released nothing under Microsoft's ownership beyond continued support for State of Decay 2.

The departure caps a troubled chapter. Microsoft acquired Undead Labs at E3 2018 alongside Ninja Theory, Compulsion Games, and Playground Games — a moment framed as Xbox's recommitment to first-party development. Of those four, only Playground delivered consistently, shipping three Forza Horizon titles and keeping Fable in development. Compulsion shipped South of Midnight in 2025 before a management buyout returned it to independence. Ninja Theory released Bleeding Edge and Hellblade 2 before also finding a new buyer. Undead Labs shipped nothing in eight years under Xbox, and reported internal dysfunction compounded what was already a bloated development timeline across the industry. Xbox's broader track record running studios — outside of Mojang — has been widely criticized, and chief content officer Matt Booty, who oversaw all of these studios throughout, remains in post.

Game Pass itself is part of the backdrop here: Sharma acknowledged the subscription service didn't grow at the pace Microsoft expected, and chief strategy officer Matthew Ball confirmed it shed millions of subscribers after price hikes last October. Microsoft cut Game Pass prices again in April 2026, though not back to pre-hike levels. Whether State of Decay 3 eventually lands on any subscription service — Xbox, PlayStation, or otherwise — is now entirely up to whoever is writing the checks this summer.