Double Fine, the studio behind Psychonauts, has laid off 23 members of staff just as it regains independence from Microsoft's Xbox division. Founder Tim Schafer said the cuts were necessary for the studio's survival, describing the decision as painful but unavoidable given the need to become a size the newly independent company can sustain financially. The layoffs highlight the difficult transition many former Xbox first-party studios face as they are cut loose or sold off amid Microsoft's ongoing restructuring.

Schafer confirmed the news in a social media post, stating the departing staff "made an impact on our games and culture" and would be missed, with the studio now offering support to those affected. According to commenters, the cuts amount to roughly a quarter of Double Fine's previous 90-strong workforce. Double Fine was one of five Xbox studios affected by cuts announced earlier in July, alongside Compulsion Games (also spun back into independence), Ninja Theory and Undead Labs (both sold to as-yet-unnamed buyers), and Arkane Studios (under review). The wider Microsoft layoffs saw 1,600 jobs cut this month, with a further 1,600 expected before July 2027.