Obsidian Reportedly Developing New Fallout Game as Xbox Shelves Avowed Sequel

Obsidian Entertainment is in early development on a new Fallout spinoff project styled after Fallout: New Vegas, according to insider reports, marking the studio’s return to the post-apocalyptic franchise for the first time in 15 years. The announcement arrives amid Xbox’s 2026 restructuring and significant layoffs, during which Obsidian lost approximately 25% of its staff as part of the 1,600+ positions cut across Xbox Game Studios. The project could release as early as 2026 or 2027, positioning it strategically between the Fallout TV show Season 2 and the eventual announcement of Fallout 5.

Obsidian Returns to Fallout with New Spinoff

Insiders report that Obsidian Entertainment is actively developing a gritty, apocalypse-styled Fallout spinoff distinct from the rumored Fallout 3 remaster being handled by Bethesda. The new project, described as “early” in development, mirrors the tone and structure of Fallout: New Vegas, the acclaimed 2010 spinoff that Obsidian developed in just 18 months. VGC’s Jordan Middler confirmed the studio is working on the Fallout project, though Bloomberg’s Jason Schreier initially disputed the claim before counter-reports solidified the news.

The timing positions the new spinoff as a bridge between major franchise entries, arriving years before Fallout 5’s expected release around 2030. George Ziets, a writer who contributed to New Vegas, is reportedly leading development on the project. This move reconnects Obsidian with the subgenre that defined its legacy, shifting focus away from expanding The Outer Worlds franchise, which the studio has confirmed will not receive a third installment.

Xbox Layoffs and Strategic Restructuring

The Fallout project emerges from Xbox’s broader 2026 restructuring, during which Microsoft eliminated over 1,600 positions across its gaming division. Obsidian Entertainment bore its share of cuts, losing roughly 25% of its workforce, yet the studio remains operational and committed to multiple projects. Jason Schreier confirmed that Xbox is keeping Obsidian and that the studio is not in negotiations to avoid closure, signaling that Microsoft views the developer as a core asset despite the economic pressures.

Despite the layoffs, Obsidian is reportedly juggling four unannounced projects simultaneously, with some described as “big” and others as smaller endeavors. The remaining staff continues supporting updates for Grounded 2 and DLC for The Outer Worlds 2, both released in 2025, while the new Fallout spinoff progresses in its early stages. This ambitious portfolio reflects Xbox’s confidence in Obsidian’s creative direction and production capabilities, even as the studio operates with a leaner team.

Avowed 2 Remains in Production Despite Commercial Uncertainty

Rumors of Avowed 2’s cancellation circulated following the franchise’s mixed commercial performance, but co-founder Chris Avellone explicitly confirmed the sequel is still in production. “There most certainly is an Avowed 2 in production,” Avellone stated, putting to rest speculation fueled by Xbox’s cost-cutting measures. The original Avowed, released in February 2025, attracted approximately 5.9 million players and achieved a Metacritic score of 80, yet undersold relative to Microsoft’s expectations due to its release on Xbox Game Pass.

Direct sales figures underscore the challenge: Avowed sold just under 650,000 copies on Steam alone, with total sales across all platforms estimated to approach 1 million. These numbers, while respectable, fell short of internal projections, prompting initial concerns about the sequel’s viability. However, Xbox’s decision to greenlight Avowed 2 suggests the publisher prioritizes Game Pass player engagement over traditional unit sales metrics. A PlayStation 5 port of the original Avowed is expected in 2026, potentially expanding the franchise’s reach and revenue.

Obsidian’s Legacy with Fallout and New Vegas

Obsidian’s track record with the Fallout franchise remains unparalleled among external developers. The studio developed Fallout: New Vegas in just 18 months, delivering a critically acclaimed spinoff that Bethesda’s Todd Howard described as a project for which Obsidian was “the only choice.” New Vegas released in 2010, meaning a new Obsidian-developed Fallout game would arrive 15 years later, representing a significant reunion between the studio and the post-apocalyptic series.

This historical context strengthens the credibility of the current reports. Obsidian’s proven ability to produce high-quality Fallout content rapidly—coupled with Todd Howard’s public endorsement of the studio—positions the developer as the logical choice for bridging the gap between the franchise’s current state and Fallout 5’s eventual release. The studio’s portfolio demonstrates expertise in crafting narrative-driven RPGs with the thematic and mechanical depth that Fallout fans expect.

What to Monitor in the Coming Months

The next critical milestone arrives with Fallout TV show Season 2, scheduled for December 2026, which could serve as a promotional platform for announcing the new Obsidian spinoff. Official confirmation from either Obsidian or Xbox remains pending, though insider reports continue to solidify the project’s existence. The studio’s ability to maintain development momentum while operating with reduced staff will be crucial to meeting the projected 2026–2027 release window.

Xbox’s broader strategy is becoming clearer: sustain franchise momentum through spinoffs and remasters while major sequels enter extended development cycles. Obsidian’s new Fallout project exemplifies this approach, leveraging the studio’s proven expertise to deliver content fans expect while Bethesda focuses on Elder Scrolls VI and the main Fallout 5. As layoffs continue across the industry and development timelines stretch longer, the success of this Obsidian spinoff could define Xbox’s ability to maintain player engagement during the current console generation.