Psychonauts 2 Developer Double Fine Hit With Layoffs After Xbox Exit
▼ Summary
– Double Fine has completed its separation from Xbox, becoming an independent studio with its IP, catalog, and funding for future games.
– The studio confirmed layoffs affecting 23 individuals, attributing them to downsizing necessary for survival as an independent company.
– The layoffs follow Double Fine’s spin-off from Xbox amid broader cuts at Microsoft, which have included 1,600 layoffs with another 1,600 planned.
– Founded in 2000 by Tim Schafer, Double Fine was acquired by Xbox in 2019 and released titles like Psychonauts 2, Keeper, and Kiln under that ownership.
– Xbox has stated Double Fine will retain its owned IP and catalog after the separation.
Psychonauts 2 developer Double Fine has confirmed layoffs affecting 23 employees, marking a painful start to the studio’s return to independence after separating from Xbox. The San Francisco-based studio announced the cuts in a statement on July 28, 2026, attributing the decision to the financial realities of operating outside its former parent company.
“Only the survival of our studio would ever make us consider such a painful action,” Double Fine said in its statement. “Our transition to becoming an independent company also means becoming a size that we can sustain.” The layoffs come as part of a broader restructuring that sees the studio regain control over its intellectual property, catalog, and development runway for future projects.
An Xbox spokesperson confirmed the separation to Kotaku, stating: “Double Fine fully returned to independent management earlier this week, with their IP, catalog, and runway for their next games. As they begin their next chapter as an independent studio, we look forward to seeing what they create next.” However, Xbox declined to specify how long that runway will last.
The layoffs follow a tumultuous period for Xbox, which has been grappling with profitability challenges after a years-long acquisition spree. One month ago, 1,600 Xbox employees were laid off, with another 1,600 cuts planned over the coming year. Double Fine’s spin-off is part of this larger shake-up, driven by the division’s lack of profitability within Microsoft.
Founded in 2000 by Tim Schafer and other ex-LucasArts developers, Double Fine built a reputation for experimental, quirky titles, many originating from internal game jams. The studio released its debut, Psychonauts, in 2005 and remained independent until Xbox acquired it in 2019. Under Microsoft, Double Fine launched Psychonauts 2 in 2021, followed by Keeper in 2025 and Kiln earlier this year. While both later titles earned critical praise for their creativity, neither achieved blockbuster sales.
Xbox head Asha Sharma has confirmed that Double Fine will retain ownership of its IP and catalog post-separation, but the studio now faces the challenge of rebuilding its workforce and financial footing. For a team that has survived for over two decades, this latest transition will test its resilience once again.
(Source: Kotaku)
