Microsoft is reportedly considering closing multiple Xbox studios, including Compulsion Games and Double Fine, amid financial pressures and restructuring efforts, according to multiple sources. The news follows internal emails highlighting the company’s financial struggles, with reports of potential layoffs and studio negotiations. Kotaku and Wccftech detail the uncertainty surrounding studios like Ninja Theory and Arkane Lyon, while IGN and The Verge provide context on internal communications and financial disclosures.
Financial Strain and Internal Emails
Microsoft’s gaming division faces mounting pressure as it struggles to balance its $20 billion investment in studios over five years—excluding the $69 billion Activision Blizzard King acquisition—with a nearly half-billion-dollar revenue decline during the same period. An internal email from Xbox CEO Asha Sharma and Game Studios head Matt Booty, shared with employees, acknowledged the company had “over extended” itself through acquisitions and platform strategies, while admitting studios were “not adequately funded” to compete. IGN reported that Sharma’s memo emphasized the need for a “sustainable business” to maintain Xbox’s position as “one of the best sources of entertainment.”
Microsoft CEO Satya Nadella echoed these concerns, noting that “there’s more monetization of Xbox games happening on YouTube” than on the platform itself. He called for innovations in both hardware and games to ensure economic viability. “No one can accuse Microsoft of not having invested for the last 25 years,” Nadella said, but added, “Now, we have to turn this into a sustainable business.”
For more on this story, see Xbox to Shutter Peabody-Winning Compulsion Games Amid $500M Revenue Drop.
Studio Closures and Layoffs
Compulsion Games, the developer behind *South of Midnight* and *We Happy Few*, is the most recent target of potential closure. Kotaku reported that the studio’s leadership is in “negotiations” with Microsoft, though no final decisions have been made. The studio, founded in 2009, has faced challenges despite critical acclaim, with *South of Midnight* failing to attract a significant audience. Wccftech added that Arkane Lyon, known for *Dishonored* and *Deathloop*, is also “scared” of closure, citing financial risks and delays in its upcoming *Marvel’s Blade* project.
This follows our earlier report, Xbox & Sony’s June 2026 Showcases: 15+ Events, Wolverine, FF7 & More-Full Schedule.
Double Fine and Ninja Theory, developers of *Psychonauts* and *Hellblade*, are also reportedly in “similar situations,” according to Kotaku. Meanwhile, IGN noted that head of Xbox Game Studios Craig Duncan resigned days before the layoffs, signaling a leadership shakeup. Microsoft has not commented on the situation.
Industry Reactions and Analyst Perspectives
Analysts suggest the closures reflect broader challenges in the gaming industry, where first-party exclusives struggle to compete with free-to-play models and streaming platforms. “The studios most exposed are brilliant for prestige and rotten for the spreadsheet,” one analyst told IGN. The financial pressure is compounded by Game Pass’s sales cannibalization, which has hurt first-party titles like *South of Midnight*.
Read also: Xbox CEO Asha Sharma Faces Tough Decisions Over Subscriptions.
Some critics argue that Microsoft’s focus on acquisitions has diverted resources from smaller, innovative studios. “Tango Gameworks was shuttered despite its potential, and now Compulsion faces the same fate,” said a Wccftech source. Meanwhile, The Verge highlighted the tension between creative ambition and fiscal responsibility, noting that “a reliable pipeline of first- and third-party exclusives is critical to success.”
What Comes Next for Xbox?
The coming months will determine whether Microsoft’s restructuring efforts will stabilize its gaming division or further erode its market position. The company has accelerated development on *The Elder Scrolls*, *Fallout*, and *Halo* games, signaling a shift toward high-profile franchises. However, the potential loss of studios like Ninja Theory and Arkane Lyon could weaken Xbox’s creative edge, particularly in the wake of its 3% accountability margin—a figure Sharma described as unsustainable.
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