Obsidian reportedly cancels Avowed 2 as Xbox shifts the studio toward a new Fallout game

Obsidian Entertainment has reportedly canceled Avowed 2 after Xbox’s latest round of layoffs, with the studio now being redirected toward a new Fallout project. The move appears to be part of a wider Xbox strategy that puts more funding and attention behind Microsoft’s biggest owned franchises.

The reported change follows major cuts at Obsidian. The studio is said to have lost 52 employees, which lines up with earlier reporting that around a quarter of its workforce had been affected. Even so, Obsidian is not being shut down. Instead, the studio is being reshaped around projects Xbox believes can deliver a stronger commercial return.

That seems to mean Fallout is moving ahead while Avowed 2 is being pushed aside. The original Avowed launched in 2025 and gave Obsidian a new first person RPG set in the Pillars of Eternity universe. A sequel had reportedly been planned, but Xbox’s new leadership is now said to be prioritizing franchises with broader recognition.

The most notable part of the report is who may lead the new Fallout game. Josh Sawyer, the director of Fallout: New Vegas, is reportedly attached to the project. That detail will immediately raise expectations, since New Vegas remains one of the most respected Fallout entries and one of Obsidian’s most important games.

Xbox appears to be choosing proven franchises over smaller RPG worlds

The shift makes business sense on the surface. Fallout is one of the strongest RPG brands Microsoft owns through Bethesda, and the franchise has gained renewed attention in recent years. Obsidian also has a clear history with the series, making it a natural studio to revisit the setting.

However, the reported cancellation of Avowed 2 also shows the cost of Xbox’s new direction. Obsidian has long been known for building distinctive RPG worlds, including Pillars of Eternity, Tyranny, The Outer Worlds, and Avowed. Moving the studio toward Fallout may please many fans, but it could also reduce the room Obsidian has to grow its own newer franchises.

Sawyer was reportedly already working on a new RPG that had similarities to Fallout but was not part of that franchise. Under Xbox’s new mandate, that project may now be converted into an official Fallout game. If true, it shows how strongly Microsoft is pushing teams toward recognizable brands rather than original or smaller scale ideas.

The move also comes at a time when Xbox is under pressure to prove the value of its large studio acquisitions. After spending heavily on Bethesda and Activision Blizzard, Microsoft needs major releases that can drive sales, subscriptions, and engagement. Fallout fits that plan better than Avowed, especially if Xbox wants more frequent releases from its strongest RPG properties.

Still, canceling Avowed 2 could disappoint players who wanted to see the first game’s ideas expanded. Avowed had room to grow, and a sequel could have refined its combat, world design, and connection to the Pillars universe. Losing that opportunity means another Obsidian world may be paused before it reaches its full potential.

The decision may also hint at how Xbox views Bethesda’s other major franchises. The Elder Scrolls VI is still believed to be years away, and Xbox may want to avoid long gaps between releases tied to its biggest RPG names. If that logic holds, Obsidian could eventually be asked to help with more than Fallout.

For now, the report points to a clear change in priorities. Obsidian is still alive, but its future may be less about building several mid sized RPG identities and more about strengthening Xbox’s largest franchises. A new Fallout from the director of New Vegas would be a major announcement if confirmed, but it appears to come at the expense of Avowed 2 and possibly some of the studio’s creative independence.