Ethan Crossfield 
Microsoft is reportedly considering shutting down Compulsion Games, the Montreal studio behind South of Midnight, as part of a wider Xbox restructure. If confirmed, the move would mark a major shake-up for a developer that recently earned top awards for its latest action game—and it arrives amid growing questions about what Microsoft’s next phase for Xbox looks like.
What happened: Compulsion Games faces an uncertain future
Multiple reports claim Microsoft plans to close down Compulsion Games, an Xbox subsidiary based in Montreal. The studio is known for developing South of Midnight and also worked on We Happy Few and Contrast.
At this stage, the impact on headcount is unclear, with no official confirmation from either Microsoft or Compulsion Games mentioned in the reporting. The reports also suggest the studio may not have been operating under a finalized decision—sources indicate Compulsion Games was in negotiations with Microsoft about its potential fate, though no details have been shared publicly.
Compulsion Games’ most recent release, South of Midnight, is an action game centered on folklore and culture from the American South. The title launched in 2025 and later expanded to Switch 2 and PS5 on March 31, 2026. Microsoft’s distribution strategy also includes availability on Xbox Game Pass for Premium, Ultimate, and PC subscribers.
Despite the studio’s recent visibility and recognition—South of Midnight won Games for Impact at The Game Awards 2025 and received a Best New Intellectual Property honor at the 22nd BAFTA Game Awards—those achievements may not be enough to prevent a studio closure if Microsoft’s restructuring priorities demand cuts.
The uncertainty around Compulsion Games also appears to sit alongside earlier hiring activity. Reports note the studio had been looking to hire programmers for a new, unannounced IP project not long ago, leaving open the question of whether that work will continue if the studio’s future is reversed or ended.
Why it matters: Xbox’s reset could reshape its studio lineup
The reported shutdown comes shortly after Xbox leadership signaled a broader “reset” for the company’s gaming organization. Days before, Xbox CEO Asha Sharma released a letter to staff describing changes to Xbox’s infrastructure. While the letter itself did not explicitly point to layoffs, sources indicate job cuts could occur after Microsoft’s current fiscal year ends on June 30.
The same reporting frames the reset in financial terms. Microsoft’s Xbox arm reportedly spent over $20 billion over five years on ongoing investments, while the profit margin reportedly declined year-on-year by 3%.
Compulsion Games is not the only potential casualty in the wider narrative. Reports suggest that along with studio reductions, marketing budgets could also be affected—though the overall scale of changes remains unclear.
There’s also a bigger structural question being raised: a separate report said selling Xbox is “on the table” for Microsoft. That would involve restructuring Xbox into a wholly-owned subsidiary, similar to how GitHub is structured. Under that scenario, Xbox could potentially be sold to another company or used to create a joint venture with other partners.
Meanwhile, Xbox may still aim to accelerate first-party output from major franchises. The June 12 reporting claims Microsoft could double down on IP such as Halo, The Elder Scrolls, and Fallout to produce more first-party titles at a faster pace. If Compulsion Games is closed, it also raises the practical issue of what happens to smaller or mid-tier IP support inside the broader Xbox ecosystem.
What to watch next: negotiations, staffing impact, and unfinished IP
With no official comment from Microsoft or Compulsion Games, the next development is likely to come from confirmation—or denial—of the reported closure. The fact that sources describe negotiations suggests the studio’s status may still be in flux, and it remains unknown how many employees could be affected.
Another key point to monitor is the fate of Compulsion Games’ unannounced project. The studio had reportedly been hiring for a new IP, so players and industry watchers will want clarity on whether that work continues under Microsoft or is paused or canceled.
Finally, the situation sits alongside ongoing communication from Xbox about upcoming work, including another official update related to The Elder Scrolls 6. How Microsoft manages announcements and development priorities during a broader reset could indicate whether the company is shifting resources toward marquee franchises—or if more studios beyond Compulsion Games are at risk.
Takeaways for fans and players
- If Compulsion Games is closed, the studio behind South of Midnight may not be able to continue future projects under its current team.
- South of Midnight’s awards and Game Pass presence may not protect studios if Xbox’s broader restructuring targets studio operations.
- Keep an eye on official statements to learn whether negotiations lead to layoffs, transfers, or a different outcome for the Montreal team.
- The status of an unannounced Compulsion IP could be the next major signal of how Microsoft will handle “future” work during the reset.
- If Xbox’s structure changes further, franchise strategy could shift—especially around how resources are distributed between major IP and smaller developers.
Expert View
For players, the reported closure is the kind of industry jolt that turns recent momentum into uncertainty overnight—especially when a studio’s latest game has been recognized at major award shows. For the studio, the key risk is that success and platform expansion don’t necessarily translate into long-term security when corporate restructuring is on the table. And for Xbox, this is a test of focus: Microsoft says it wants faster first-party output, but cutting a studio that has already delivered a distinct new IP could signal a more aggressive “consolidate resources” approach—one that may leave smaller projects fighting for survival.
