Microsoft to Shut Down Compulsion Games Amid Xbox Layoffs
Microsoft is reportedly closing Compulsion Games, the developer of South of Midnight, according to reports from ResetEra. This action follows internal memos from Xbox CEO Asha Sharma citing a $50 billion revenue drop, and aligns with broader layoffs predicted by Bloomberg and The Verge for July 2026.
A ResetEra user identified as “LinkWink” claims employees at Compulsion Games have already received layoff notices. The source indicates that the studio’s closure is imminent. This development matches predictions from Bloomberg and The Verge, which forecast that Xbox Game Studios will cut approximately 10% of its workforce by the end of the current fiscal year in July 2026.
Why is Microsoft shutting down Compulsion Games?
Financial instability and poor market performance drove the decision. According to an internal memo from Xbox CEO Asha Sharma, the gaming division saw revenue plummet by $50 billion while operating costs increased fourfold. Compulsion Games, known for We Happy Few and South of Midnight, struggled with mixed critical reviews and low sales figures on Steam.
Microsoft is shifting its capital toward proven assets. Management plans to reinvest the saved budget into high-profit franchises, specifically Fallout, Halo, and The Elder Scrolls. The company is prioritizing these “safe” bets over experimental independent titles that fail to meet strict revenue targets.
What happens next for Xbox Game Studios?
The predicted July 2026 layoffs aren’t just about headcount; they involve the total dissolution of multiple development teams. Bloomberg and The Verge report that the 10% staff reduction is a strategic move to prune underperforming units entirely rather than reducing staff across all projects.
To further insulate the parent company from these financial swings, Microsoft is reportedly considering spinning the gaming division off into a separate subsidiary. This move would allow the gaming arm to manage its own risks and debts without directly impacting Microsoft’s primary balance sheet.
Comparison: The Pattern of Studio Closures
The potential closure of Compulsion Games follows a consistent corporate trajectory seen over the last several years. Unlike traditional mergers where studios are integrated, Microsoft has frequently pursued a “buy and burn” strategy.
- Tango Gameworks & Arcane Austin: Closed as part of strict cost-cutting measures.
- The Initiative: Faced significant restructuring and instability.
- Compulsion Games: Targeted following poor Steam performance and mixed reviews.
How will this affect future Xbox titles?
Players can expect fewer experimental titles and more sequels. By focusing on Halo and Elder Scrolls, Microsoft is moving away from the “variety” strategy it used during its massive acquisition spree. The focus has shifted from expanding the library to maximizing the return on existing intellectual property.
Industry critics on platforms like Reddit have slammed this strategy, arguing that Microsoft acquires independent studios only to liquidate them the moment they face financial headwinds. This volatility makes it harder for creative teams to take risks on new genres or art styles.
Frequently Asked Questions
Which studio is Microsoft reportedly closing?
Compulsion Games, the developer of South of Midnight and We Happy Few.
Why are the layoffs happening?
CEO Asha Sharma cited a $50 billion revenue drop and a fourfold increase in costs, alongside poor sales for specific titles.
When will the full layoffs occur?
Bloomberg and The Verge report that large-scale cuts are expected by July 2026.
What franchises is Microsoft prioritizing?
The company is reinvesting in Fallout, Halo, and The Elder Scrolls.
What do you think about Microsoft’s strategy of closing smaller studios to fund major franchises? Does this kill creativity in the Xbox ecosystem? Let us know in the comments or subscribe to our newsletter for more industry updates.