Psychonauts 2 Studio Double Fine Hit With Layoffs Amid Divestiture From Xbox

Psychonauts 2 developer Double Fine is undergoing layoffs, Kotaku has learned.

The number and roles of individuals impacted is 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, as it is unclear where Double Fine is in the 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 and multiple years of overstretching itself by buying up studios. Within Xbox, 1600 individuals were laid off one month ago, with another 1600 planned throughout the coming year. It is unclear if these layoffs at Double Fine today were instigated by Xbox or Double Fine, though given the circumstances, Double Fine itself is more likely.

Double Fine has existed for over two decades, initially founded by Tim Schafer and other ex-LucasArts colleagues 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.