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Obsidian Entertainment, a subsidiary of Microsoft Corp.’s Xbox, has canceled multiple projects and will begin working on a new game in the popular Fallout franchise as part of the division’s broader restructuring, according to people familiar with the matter.

The video-game studio, based in Irvine, California, also laid off around a quarter of its workforce, said the people, who asked not to be identified because they were not authorized to speak to the press.

As part of the shake-up, Obsidian has canceled a planned sequel to the 2025 roleplaying game Avowed along with other unannounced projects.

Under the new plan, studio design director Josh Sawyer will lead a new title in the Fallout universe — a series of roleplaying games that take place in an alternate history in which the U.S. has been ravaged by nuclear war. The emerging strategy is still in flux, the people said, and could still change.

Previously, Sawyer had been directing a roleplaying game that was similar structurally and thematically to Fallout but was not part of the franchise.

An Xbox spokesperson declined to comment.

The shifts take place as Xbox Chief Executive Officer Asha Sharma executes what she has called a “reset” of the organization. On Monday, Sharma announced plans to cut 3,200 jobs and divest five studios. She’s said she’ll invest more in the company’s biggest franchises, including Fallout, which has sold tens of millions of copies and led to a hit show from Amazon.com Inc. that is currently filming its third season.

Despite its critical and commercial success, the Fallout video-game series has not seen a new entry since 2018’s online title Fallout 76 because its primary developer, Xbox’s Bethesda Game Studios, has been focused on other projects. Bethesda has also regularly updated and created new content for Fallout 76, which has reached more than 23 million players.

The only Fallout game in the last two decades to not come from Bethesda was 2010’s Fallout: New Vegas, developed by Obsidian and directed by Sawyer. Although New Vegas has become a fan favorite, Bethesda has maintained control over the franchise. The Rockville, Maryland-based studio will work with Obsidian on the new project, the people said.

Obsidian released three games last year, two of which did not meet sales expectations, including Avowed, the company told Bloomberg Businessweek. The studio had been hoping to build on Avowed by developing a sequel in a shorter timeframe using the world and technology that it had already created.

Progress on the sequel was going well, and it was on track to be announced within the next year. But in the end, it did not fit into Sharma’s overall strategy, according to people familiar with the game’s development.

Some Obsidian employees will continue working on the Avowed sequel as they wait for new projects such as Fallout to be ready, perhaps in hope of one day reviving the game, the people said.

Obsidian will also continue to develop downloadable content for last year’s The Outer Worlds 2, the people said, and will also still work on its live-service multiplayer survival game, Grounded 2.

Schreier writes for Bloomberg.

Several studios in Microsoft Corp.’s Xbox gaming division, including Montreal-based Compulsion Games and San Francisco-based Double Fine, are in active negotiations to spin off as they try to thwart closure, according to people familiar with the company’s plans.

Cambridge, England-based Ninja Theory, the maker of Hellblade, is also in conversations with Xbox, as are several other studios across the portfolio that are at risk of being shuttered.

The studios may still have the opportunity to buy themselves back from Xbox and go independent, although many employees will probably lose their jobs as a result, said the people, who asked not to be named because they were not authorized to speak to the press.

Employees at several studios have been informed of the situation and given permission to seek new work but were told that the status of the studios is still in flux.

An Xbox spokesperson declined to comment.

The potential closures are part of a broader reorganization being overseen by Asha Sharma, who took over as Xbox’s new chief executive in February.

Last week, Bloomberg News reported that the gaming division is planning significant layoffs. Sharma sent out a memo to staff lamenting the bleak state of the business, which has seen revenue and margins plummet in recent years. “Going forward, this cannot continue,” she wrote.

Compulsion Games, Double Fine and Ninja Theory all made award-winning games that were not commercial hits. But even some of Xbox’s more commercially successful studios are not yet sure how they will fit into Sharma’s new mandate, which will prioritize the biggest franchises as the company looks to return to growth.

Compulsion Games is the developer behind South of Midnight, which was released last year. Double Fine, best known for the Psychonauts series, released the smaller games Keeper and Kiln over the last year.

Xbox is facing the current challenges despite having made major purchases in recent years, including its acquisition of Activision Blizzard Inc. for $69 billion in a deal that closed in 2023.

Xbox Game Studios head Craig Duncan stepped down last week ahead of the layoffs, said the people familiar with Microsoft’s plans. Gaming newsletter the Game Business previously reported his departure.

Schreier writes for Bloomberg.