Why Did Xbox Cancel Avowed 2? Inside the Business Decision and What It Means for Obsidian
Saturday, July 11, 2026The cancellation of Avowed 2 in July 2026 shocked the gaming industry, especially given that the original Avowed had just launched in February 2025 to positive reviews. But the decision wasn't about the game's quality or performance—it was about Xbox's evolving business strategy under new leadership.
This analysis breaks down the business factors behind the cancellation, what it reveals about Xbox's first-party strategy, and what it means for Obsidian Entertainment's future within Microsoft.
Executive Summary: The Three Key Factors
- Strategic Reset Under New Leadership: New CEO Asha Sharma initiated a "big reset" of Xbox's first-party portfolio, cancelling several projects to focus resources on the biggest franchises
- Franchise-First Investment Model: Xbox is shifting toward a model where only the largest, most proven franchises (Fallout, Elder Scrolls, Forza, Call of Duty) receive full investment
- Portfolio Rationalization: The cancellation coincided with greenlighting a new Fallout game at Obsidian, suggesting a deliberate choice to prioritize established IP over new sequels
The Business Context: Xbox's Strategic Shift
To understand why Avowed 2 was cancelled, we need to look at the broader changes happening at Xbox in 2026.
New CEO, New Strategy
In early 2026, Microsoft appointed Asha Sharma as the new CEO of Xbox, replacing Phil Spencer. Sharma brought a different philosophy to the role, focusing on:
- Profitability Over Prestige: A shift away from "prestige" gaming projects toward titles with clearer paths to profitability
- Franchise Consolidation: Concentrating resources on the biggest, most bankable franchises rather than spreading investment across multiple mid-tier properties
- Risk Mitigation: Reducing the number of high-risk, high-cost projects in favor of safer bets with proven track records
This strategic shift directly impacted Obsidian Entertainment, which found itself at the center of Xbox's portfolio rationalization.
The "Big Reset" Mandate
According to reporting, Sharma mandated a comprehensive review of all Xbox first-party projects in July 2026. This "big reset" resulted in:
| Action | Projects Affected | Rationale |
|---|---|---|
| Cancelled | Avowed 2, Shadowrun project at Obsidian | Mid-tier RPGs outside of core franchise strategy |
| Greenlit | New Fallout game at Obsidian | Major franchise with proven commercial success |
| Continued | Grounded, Outer Worlds 2 expansions | Already in advanced development or outsourced |
Avowed 1's Performance: Was It a Factor?
One of the first questions people asked was whether the original Avowed underperformed commercially. The answer appears to be no.
What We Know About Avowed 1
- Release Date: February 2025
- Reception: Positive reviews from critics and players
- Sales Performance: While exact numbers haven't been disclosed, reporting suggests Avowed performed adequately for a new IP
- Player Engagement: Strong launch on Xbox and PC, with healthy player counts
Why Performance Wasn't the Issue
According to industry sources, Avowed 2 wasn't cancelled because the first game failed. Instead, the cancellation reflects a strategic decision about where Xbox wants to invest its resources going forward. The game was a victim of changing priorities, not poor performance.
This is an important distinction: Avowed 2 was cancelled not because it was a bad bet, but because Xbox is making fewer bets overall and focusing exclusively on the biggest franchises.
The Fallout Factor: Why Obsidian Got a New Game Instead
Perhaps the most telling aspect of the Avowed 2 cancellation is that it coincided with Xbox greenlighting a new Fallout game at Obsidian. This reveals the core of Xbox's new strategy.
The Franchise Hierarchy
Under Asha Sharma's leadership, Xbox has established a clear hierarchy of franchise investment:
- Call of Duty (Infinity Ward, Treyarch, etc.)
- Forza (Turn 10, Playground Games)
- Elder Scrolls (Bethesda Game Studios)
- Fallout (Bethesda Game Studios, with Obsidian support)
- Starfield (Bethesda Game Studios)
- Grounded (Obsidian, outsourced to Eidos Montreal)
- Outer Worlds 2 expansions (Obsidian)
- Existing franchises with active development
- New sequels to recent IPs (like Avowed 2)
- Original projects outside major franchises
- Mid-tier RPGs without established commercial track records
Why Fallout Won Over Avowed 2
The decision to greenlight a new Fallout game while cancelling Avowed 2 comes down to risk assessment:
| Factor | New Fallout Game | Avowed 2 |
|---|---|---|
| Franchise Recognition | Massive (decades of brand awareness) | Limited (one game released in 2025) |
| Commercial Track Record | Proven (Fallout 4, Fallout 76, TV show success) | Unproven (single title, no sequel data) |
| Development Team | Obsidian + Bethesda collaboration | Obsidian only |
| Market Timing | Strong (TV show boosted interest) | Uncertain (new IP still establishing itself) |
| Risk Level | Low (established franchise) | Medium (sequel to new IP) |
From Xbox's perspective, investing in a new Fallout game is a safer bet than continuing Avowed 2, even if Avowed 2 might have been a good game. The franchise-first model prioritizes certainty over potential.
What This Means for Obsidian Entertainment
The cancellation of Avowed 2 has significant implications for Obsidian Entertainment, both in the short term and long term.
Short-Term Impact
- Studio Restructuring: Obsidian had to reassign developers from Avowed 2 to other projects, particularly the new Fallout game
- Morale Challenges: Cancelling a project that a team has been working on creates uncertainty and can impact studio culture
- Resource Reallocation: The studio must now focus on completing Outer Worlds 2 expansions and supporting the new Fallout game
Long-Term Strategic Position
Despite the cancellation, Obsidian's position within Xbox remains relatively secure:
- Continued Investment: Xbox is still funding multiple Obsidian projects (Grounded, Outer Worlds 2, new Fallout)
- Franchise Access: Obsidian has been entrusted with a major franchise (Fallout), indicating Microsoft's confidence in the studio
- Strategic Importance: Obsidian remains one of Xbox's key RPG development studios
However, the cancellation sends a clear message: Obsidian must align its projects with Xbox's franchise-first strategy to secure future investment.
The "Re-Pitch" Strategy: Obsidian's Gambit
As reported by Chris Avellone and Jason Schreier, Obsidian is continuing work on Avowed 2 with a skeleton crew, hoping to get the game so close to completion that Xbox will approve its release. This strategy reveals:
- Studio Belief: Obsidian clearly believes in the project enough to continue investing resources without official approval
- Calculated Risk: The studio is betting that the cost of completing Avowed 2 will be low enough that Xbox will greenlight it
- Leverage Building: By advancing development, Obsidian hopes to create leverage in future negotiations with Xbox
This is a bold move that could pay off if the game is far enough along, but it also represents a significant gamble for the studio.
Phil Spencer's Legacy vs. Asha Sharma's Vision
The Avowed 2 cancellation also highlights the contrast between Phil Spencer's leadership and Asha Sharma's approach.
Phil Spencer's Era
Under Phil Spencer, Xbox pursued a strategy of:
- Acquiring diverse studios (Obsidian, inXile, Double Fine, etc.)
- Investing in a wide portfolio of projects
- Emphasizing creative freedom and studio autonomy
- Building Game Pass through content variety
Spencer publicly praised Obsidian and Avowed, suggesting strong support for the franchise's future.
Asha Sharma's Era
Under Asha Sharma, Xbox is pursuing:
- Portfolio consolidation and rationalization
- Franchise-first investment model
- Focus on profitability and risk mitigation
- Centralized strategic direction from leadership
The Avowed 2 cancellation is one of the clearest examples of this strategic shift in action.
What This Says About Xbox's First-Party Strategy
The Avowed 2 cancellation reveals several key aspects of Xbox's current first-party strategy:
1. Franchise Supremacy
Xbox now prioritizes established franchises over new IPs or recent sequels. The message is clear: if your project isn't part of a major, proven franchise, it's at risk.
2. Risk Aversion
Despite Xbox's size and resources, the company is becoming more risk-averse, preferring safer bets with proven commercial track records over potentially innovative but uncertain projects.
3. Centralized Control
The "big reset" suggests that Xbox is exercising more centralized control over its first-party portfolio, with strategic decisions coming from the top rather than emerging organically from studios.
4. Game Pass Evolution
The shift may also reflect evolving thinking about Game Pass. Rather than filling the service with a wide variety of content, Xbox may be focusing on fewer, bigger titles to drive subscriptions.
Frequently Asked Questions (FAQ)
Was Avowed 2 cancelled because the first game failed?
No. According to industry reporting, Avowed 1 performed adequately and received positive reviews. The cancellation of Avowed 2 was a strategic decision related to Xbox's new franchise-first investment model, not a reflection of the first game's performance.
Why did Xbox greenlight a new Fallout game but cancel Avowed 2?
Xbox's new strategy under CEO Asha Sharma prioritizes established franchises with proven commercial success. Fallout is a decades-old franchise with massive brand recognition, while Avowed is a new IP with only one released game. From a risk assessment perspective, Fallout is a safer investment.
What does this mean for Obsidian Entertainment's future?
Obsidian remains in a relatively secure position within Xbox, with multiple projects still funded (Grounded, Outer Worlds 2, new Fallout). However, the studio must align its future projects with Xbox's franchise-first strategy to secure continued investment. The cancellation signals that new sequels to recent IPs are at higher risk.
Is Avowed 2 really still being developed?
According to Chris Avellone and Jason Schreier, yes. A small team at Obsidian is continuing work on Avowed 2 despite the official cancellation, hoping to get the game close enough to completion that Xbox will approve its release. This is an unofficial "re-pitch" strategy.
How does this affect other Xbox studios?
The Avowed 2 cancellation is part of a broader "big reset" affecting multiple Xbox first-party studios. The message to all studios is clear: projects must align with the franchise-first strategy, and those outside major franchises are at risk of cancellation.
Will Xbox's strategy change again in the future?
Corporate strategies often evolve, especially under new leadership. While Asha Sharma's franchise-first model is the current approach, future leadership changes or market conditions could prompt another strategic shift. However, for now, this is the direction Xbox is heading.