Double Fine, the studio behind Psychonauts, has cut around a quarter of its staff after being spun off from Xbox as an independent company. The layoffs come just three weeks after Microsoft announced sweeping restructuring across Xbox, and reflect the studio's need to resize itself now that it no longer operates under Xbox's corporate umbrella. The move matters because it highlights the ongoing fallout from Xbox's cost-cutting drive, which continues to affect studios acquired during its years-long buying spree.

Double Fine confirmed on 28 July 2026 that 25.6% of its roughly 90-person team had been let go, calling the decision painful but necessary for the studio's survival as it becomes "a size that we can sustain." Xbox said Double Fine, along with fellow studio Compulsion Games, had fully returned to independent status earlier that week, retaining their IP, catalogue and runway for future projects. Both studios were originally founded as independents, with Double Fine set up by Tim Schafer in 2002, before being acquired by Microsoft. The layoffs follow Xbox CEO Asha Sharma's 6 July 2026 announcement of the company's biggest-ever restructuring, which is set to affect around 3,200 staff, roughly a fifth of Xbox's workforce.