"Xbox is reportedly planning to shut down Compulsion Games, the studio behind Peabody Award-winning titles like South of Midnight and We Happy Few, according to Kotaku and IGN. The move follows internal memos detailing financial struggles, including a $500 million revenue drop in the Xbox division, and signals a broader restructuring effort under CEO Asha Sharma. Microsoft has not officially confirmed the closure, but employees have reportedly received layoff notices."
Shutdown Announcement and Immediate Impact
Xbox’s decision to shutter Compulsion Games, a studio founded in 2009 and acquired by Microsoft in 2018, has sent shockwaves through the gaming industry. The news emerged after Kotaku reported that the studio’s LinkedIn page listed around 90 employees, though internal sources suggest the actual number is higher. Multiple staff members have since posted on social media seeking new opportunities, with one employee describing the situation as “devastating.”
The shutdown comes just days after Xbox Game Studios head Craig Duncan resigned, adding to speculation about internal instability. IGN noted that Compulsion’s talent lead, Joe Palin, had advertised roles for a “fascinating, intriguing, brand new IP” just two months prior, a project now reportedly abandoned. The studio’s last major release, South of Midnight, won a Peabody Award in 2026 and a BAFTA for New Intellectual Property, but critics highlighted its “repetitive combat” and “poor sales on Steam,” according to Video Games Chronicle.
Financial Context and Executive Statements
Xbox CEO Asha Sharma’s internal memo, published on the Xbox Wire blog, revealed the division’s financial distress. She cited a 3% “accountability margin”—Microsoft’s profit metric—and stated that the company had spent $20 billion on content, platform, and hardware subsidies over five years while revenue declined by nearly $500 million. “Going forward, this cannot continue,” she wrote, framing the restructuring as a “reset” to focus on “the most successful and profitable franchises.”
A $500 million revenue drop in the Xbox division, mentioned in an internal memo cited by GameGPU, underscores the scale of the challenge. Sharma’s comments align with broader industry trends, as Microsoft has previously closed studios like The Initiative and Arkane Austin amid financial pressures. The move to prioritize franchises such as Fallout, Halo, and Elder Scrolls reflects a strategic pivot toward “safe bets” over experimental titles, a shift criticized by some developers.
Reactions and Industry Implications
Industry analysts have weighed in on the implications of Compulsion’s closure. A source quoted by IGN described the decision as “a clear signal that prestige studios are seen as expendable when spreadsheets don’t add up.” The studio’s Peabody Award win for South of Midnight—a game praised for its “beautiful storytelling” by Video Games Chronicle—highlights the tension between artistic ambition and profitability.
Microsoft’s approach mirrors broader trends in the gaming sector, where large publishers increasingly prioritize short-term gains over long-term creative investment. Compulsion’s closure follows the shutdown of The Initiative in 2025 and reflects a pattern of “mass acquisitions followed by liquidation,” as criticized by ResetEra users. “It’s a cycle of buying talent, then discarding it when revenue falls,” one forum user wrote.
What Comes Next?
While Microsoft has not confirmed the closure, insiders suggest a formal announcement is imminent. The company is also considering spinning off its gaming division into a separate subsidiary to mitigate financial risks, a move that could further destabilize the studio’s future.
For Compulsion’s employees, the immediate concern is job security. Former staff have already begun seeking new roles, with some expressing frustration over the lack of communication from Microsoft. Meanwhile, fans of South of Midnight and We Happy Few are left questioning the future of innovative, narrative-driven games.
As Xbox refocuses on its core franchises, the fate of studios like Compulsion serves as a cautionary tale about the pressures facing creative industries in an era of financial austerity. Whether this marks the beginning of a broader restructuring or a one-off decision remains to be seen, but the message from Microsoft is clear: in the gaming world, even award-winning studios are not immune to the bottom line.
Key Timeline and Financial Figures
- April 2025: South of Midnight launches to critical acclaim but faces mixed commercial performance.
- June 2026: Internal memo reveals a $500 million revenue drop in the Xbox division.
- July 2026: Reports of impending layoffs and studio closures emerge, with 10% of Xbox’s workforce expected to be affected.
- $20 billion: Total investments in content, platform, and hardware subsidies over five years, despite declining revenue.
Quotes from Key Figures
"Excluding Activision Blizzard King, over the past five years, we have spent over $20 billion on ongoing investments in our content, platform and hardware subsidy, but our annual revenue has declined nearly half a billion during that time," wrote Asha Sharma in an internal memo.
"The big things that we’re thinking about are we want to make great games," said Matt Booty, Xbox Game Studios head, in April 2025.
"South of Midnight today won a Peabody Award, which I think is such a validation of the storytelling capability of games these days," Booty added.
References
Kotaku
<a Asha Sharma’s memo underscored the urgency to rebalance investments while Matt Booty’s vision for Xbox Game Studios continued to emphasize storytelling and innovation.
Find more reporting in our Technology section.
