Compulsion Games stands on the brink. The Montreal studio behind the Peabody Award-winning South of Midnight and the cult hit We Happy Few is reportedly set for closure. Or perhaps a painful spin-off. Sources tell Kotaku that leadership is in negotiations with Microsoft. Details remain thin. Yet the message is clear. After years of heavy investment in creative risks, Xbox now prioritizes financial discipline.
This development landed hard on June 15, 2026. It followed days after Xbox CEO Asha Sharma and Microsoft Game Studios head Matt Booty sent an internal memo outlining a stark “reset.” The pair detailed five realities. Revenue had slipped. Costs had soared. The studio count had grown too large for the current strategy. Xbox Wire published the note. It painted a picture of overextension. “We have spent over $20 billion on ongoing investments in our content, platform, and hardware subsidy,” they wrote, “but our annual revenue has declined nearly half a billion during that time.” Accountability margin sat at 3 percent. That could not continue.
From Acclaimed Storyteller to Cost Center
Compulsion once fit Xbox’s vision perfectly. Founded in 2009, the studio earned praise for atmospheric, narrative-driven games. Contrast in 2013 showed promise. We Happy Few built a dedicated following despite mixed reviews. Then came South of Midnight. Released in 2025, it earned a BAFTA for best new IP and a Peabody Award for its writing. Animation accolades piled up at D.I.C.E. Sharma herself praised the title months earlier. “The Peabody Award for South of Midnight,” she said in an April interview, according to Kotaku. Booty highlighted it too. He called the Peabody a validation of games’ storytelling power. He grouped Compulsion with Double Fine as homes for new intellectual property.
Yet praise didn’t translate to the balance sheet. Bloomberg reported that Compulsion, along with Ninja Theory and Double Fine, entered active talks to spin off as independent entities. Such moves would bring significant job losses. Employees at these studios received notice to seek other opportunities. The Mashable account noted executives exiting too. Craig Duncan, head of Xbox Game Studios, and chief of staff Louise O’Connor stepped down. Timing raised eyebrows. It came just before expected July layoffs. One source close to Compulsion told Kotaku the team size exceeded the 90 listed on LinkedIn. Job postings for a fresh IP had appeared as recently as two months prior. Now those roles evaporated. Multiple developers took to social media to signal availability.
But why Compulsion? The studio’s output won awards. Its aesthetic stood out. South of Midnight drew from Southern folklore with striking visuals. Critics lauded its writing. Still, sales figures stayed private. Industry observers point to broader trends. Xbox poured resources into Game Pass. Subscriber growth slowed. Hardware component prices spiked dramatically. The memo cited costs rising over five times in two years for certain parts. “We are in a hardware component crisis,” Sharma and Booty stated. They admitted choices from the prior half-decade left Microsoft more exposed than peers. Console shortages persisted. Meanwhile, the studio roster ballooned to support subscription, streaming and multiple platforms. That expansion now looks unsustainable.
And the reset carries consequences. Game Informer connected the dots. Reports suggest more studios could follow. Double Fine, known for Psychonauts, and Ninja Theory, creators of the Hellblade series, also negotiate their futures. Independence might preserve some identity. It would demand sharp staff reductions. Employees understand the stakes. Some already hunt positions elsewhere. The pattern echoes past cuts. Microsoft eliminated jobs across gaming in 2024 and 2025. This round targets underperformers in a tightened portfolio.
Sharma’s tenure began with optimism. She took over after Phil Spencer’s exit. Early moves included faster platform updates and Game Pass stabilization. The memo celebrated early wins. Active partners reached record levels. Showcase events drew huge audiences. Yet realism dominated the second half. “For some of you, these realities will be surprising and even frustrating,” the leaders wrote. They rejected repeating past errors. Focus would shift toward core franchises with proven demand. New IP still mattered. Balance required reassessment. The note promised evolution in infrastructure too. Less vendor reliance. Faster delivery to players.
So what happens next for Compulsion? Negotiations continue. Microsoft offered no public comment to multiple outlets. A full shutdown would erase a distinctive voice. Spin-off could birth an independent studio. History shows mixed results. Some teams thrive post-divestiture. Others struggle to secure funding. The creative talent won’t vanish entirely. Many will land at rival publishers or form new groups. Yet the loss of institutional support stings. South of Midnight proved ambitious storytelling could earn acclaim. Whether that model fits Xbox’s tightened ambitions remains in doubt.
Broader questions loom for the industry. Consolidation accelerated after the Activision Blizzard acquisition. Now even successful first-party efforts face scrutiny. Revenue must rise. Margins must improve. Hardware must become viable without massive subsidies. The memo laid it out plainly. Competition isn’t other consoles alone. It is attention itself. One billion players engage with Xbox properties yearly. They spend 72 billion hours across devices. That reach is immense. Converting it into sustainable profit is the task at hand.
Watch the coming weeks closely. July layoffs could bring official confirmations. More executive exits might surface. Studios negotiating buyouts will reveal terms. For now, uncertainty hangs over Montreal. Developers update resumes. Fans lament the potential end of a promising outfit. And Xbox charts a narrower path forward. One that values commercial viability alongside artistic achievement. The balance, it seems, has tipped.
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