Psychonauts 2 Studio Double Fine Hit With Layoffs Amid Divestiture From Xbox - Kotaku

What the report says

Kotaku reported that Double Fine, the San Francisco-based studio best known for Psychonauts and Psychonauts 2, has laid off staff while separating from Xbox and returning to independent operation. In an update to Kotaku’s July 28, 2026 report, Double Fine said 23 people were affected, describing the cuts as a painful step tied to the studio’s need to operate at a sustainable size after leaving Xbox.

An Xbox spokesperson told Kotaku that Double Fine had returned to independent management earlier in the week, retaining its intellectual property, back catalog and financial “runway” for future projects. Xbox did not tell Kotaku how much runway the studio has. The move follows a broader restructuring at Microsoft’s gaming division, which Kotaku described as involving major layoffs and a reassessment of Xbox’s studio portfolio.

Double Fine was founded in 2000 by Tim Schafer and other former LucasArts developers and built a reputation for offbeat, experimental games. It stayed independent for many years before Microsoft acquired it in 2019. During its Xbox ownership period, the studio released Psychonauts 2 in 2021, followed by Keeper in 2025 and Kiln earlier in 2026, according to Kotaku.

The development matters because Double Fine’s split from Xbox is part of a larger period of instability across the games industry and within Microsoft’s gaming business. While independence gives the studio control over its catalog and future direction, the confirmed layoffs show that the transition also brings financial and operational pressure.