Microsoft’s Xbox division is shifting Obsidian Entertainment onto a new Fallout video game, as the embattled gaming business redirects investment toward its biggest franchises following mass layoffs and studio sell-offs.

According to Bloomberg, Obsidian has cancelled multiple projects, including a planned sequel to last year’s role-playing game Avowed, and will begin work on a new title set in the Fallout universe.

The move comes just days after Microsoft gutted its Xbox division, cutting 3,200 jobs and offloading five studios as its A$108 billion Activision Blizzard acquisition continues to weigh heavily on the business.

Obsidian, the studio behind The Outer Worlds, Grounded, Pentiment and Avowed, has reportedly laid off around a quarter of its workforce as part of the broader Xbox restructure.

Under the new plan, Obsidian design director Josh Sawyer is expected to lead the new Fallout project.

Sawyer previously directed Fallout: New Vegas, the 2010 title that became a fan favourite and remains the only major Fallout game in the past two decades not developed by Bethesda Game Studios.

Bethesda, which controls the Fallout franchise, is expected to work with Obsidian on the new project.

The decision highlights Xbox CEO Asha Sharma’s new strategy of concentrating spending on proven franchises rather than spreading investment across smaller studios and experimental projects.

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Fallout is one of Microsoft’s most valuable gaming properties, boosted recently by Amazon’s hit television adaptation, which is filming its third season.

Despite that renewed interest, the games series has not had a new mainline release since Fallout 76 in 2018.

The decision to shelve a sequel to Avowed (pictured above) also highlights the brutal nature of Xbox’s reset.

Obsidian had reportedly hoped to build on the first game by reusing its world and technology for a faster follow-up, but the project no longer fitted Microsoft’s new priorities.

Obsidian is still expected to support The Outer Worlds 2 with downloadable content and continue work on Grounded 2.