Xbox Reportedly Shuts Down Compulsion Games Studio

The studio, founded in 2009 and acquired by Xbox in 2018, recently delivered the atmospheric title South of Midnight, showcasing its knack for immersive storytelling.

Sources report that the studio is slated for closure as part of a sweeping round of layoffs across Microsoft’s gaming division. While the company has not yet confirmed the claim, the announcement signals a significant contraction in the studio’s operations.

Kotaku has since updated its story, indicating that Compulsion’s leadership is reportedly in “negotiations” with Microsoft regarding the company’s future, though the specifics remain undisclosed.

Two months earlier, the studio’s talent lead, Joe Palin, had advertised on LinkedIn for programmers to work on a “fascinating, intriguing, brand new IP,” a project whose fate now hangs in uncertainty.

Last week, speculation swirled that Xbox might once again trim its workforce, following remarks from CEO Asha Sharma at a Bloomberg Tech conference. Sharma openly declared her intention to “reset the business” after noting it was “not in a healthy spot.”

In a subsequent internal memo—later shared on the Xbox Wire blog—Sharma detailed that the Xbox unit had slipped to a mere 3% “accountability margin,” a key profitability metric Microsoft uses to gauge its financial health.

Compulsion Games first made its mark with Contrast in 2013, followed by the critically acclaimed We Happy Few in 2018. Just two months before that title launched, Xbox announced it had acquired Compulsion alongside Undead Labs, Playground Games, Ninja Theory, and the newly formed The Initiative.

In 2025, The Initiative was shuttered as part of another wave of Microsoft layoffs, underscoring the volatility and consolidation trends within the industry.

Compulsion Games’ most recent release, South of Midnight, launched last year to a solid Metacritic score of 77, signalling strong critical approval. In March 2026 the title was expanded to the PS5 and Switch 2, a move that dovetails with Xbox’s broader strategy of bringing former console exclusives to a wider audience.

South of Midnight has also earned a string of prestigious awards, capturing Games for Impact at The Game Awards 2025, Outstanding Achievement in Animation at the D.I.C.E. Awards, and New Intellectual Property at the BAFTA Game Awards.

With more than a million players in its first three weeks, the game proved its appeal. CEO Guillaume Provost clarified that Compulsion’s role within Xbox is not to chase blockbuster franchises like Call of Duty, but to deliver distinctive titles that either reach underserved audiences or enrich the portfolio’s diversity. “I’m passionate about this mission as we look ahead. I can’t yet disclose which audiences, experiences, or regions we’ll target next, but I believe it’s vital for Xbox that we become a brand that resonates with people from all walks of life,” he added.

VGC’s review of South of Midnight praised the title as a stunningly crafted adventure, yet it highlighted a single significant drawback: the combat feels monotonous. Despite this, the critic emphasized that the game offers a setting, cast, and themes rarely seen in the genre, all delivered with such artistry that it commands players’ full attention.