Psychonauts 2 Studio Double Fine Hit With Layoffs Amid Divestiture From Xbox
Update 7/28/2026 3:19 p.m. ET: An Xbox spokesperson has shared the following statement with Kotaku: “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.”
Update 7/28/2026 3:05 p.m. ET: Double Fine has published the following statement confirming 23 individuals were impacted. The statement attributes the layoffs to necessity following its separation from Xbox, saying, “Only the survival of our studio would ever make us consider such a painful action. Our transition to becoming an independent company also means becoming a size that we can sustain.”
Original story continues below:
Psychonauts 2 developer Double Fine is undergoing layoffs, Kotaku has learned.
The number and roles of individuals impacted are not yet clear, nor is the precise reasoning behind the layoffs. Some individuals have begun posting about the impacts on social media. Kotaku has reached out to Double Fine for comment.
Kotaku has also reached out to Xbox, its former owner, as it is unclear where Double Fine is in its transition process out of the company. It was recently announced that Double Fine would spin off into its own independent studio once again amid a massive shake-up at Xbox sparked by the division’s lack of profitability within Microsoft, as well as multiple years of overstretching itself by buying up studios. Within Xbox, 1600 individuals were laid off one month ago, with another 1600 layoffs planned throughout the coming year.
Double Fine has existed for over two decades, initially founded by Tim Schafer and other ex-LucasArts developers in 2000 and kicking things off with its first release, Psychonauts, in 2005. The San Francisco-based studio made a name for itself with experimental, quirky games, many of which were birthed from internal studio game jams. It remained independent for years, but it frequently struggled to fund its projects before its acquisition by Xbox in 2019. Under Xbox, Double Fine released Psychonauts 2 in 2021, and followed up with Keeper (which was great but seemingly not very lucrative) in 2025 and Kiln (which is very fun and clever but also seemingly not very popular) earlier this year. Xbox head Asha Sharma has said that Double Fine will be able to keep its owned IP and catalog post-separation.