Xbox Layoff Reports Intensify As Compulsion Games Faces Possible Closure

Xbox is reportedly heading into another major round of layoffs, with new reports pointing to significant cuts and the possible shutdown of South of Midnight developer Compulsion Games.

Microsoft has not officially confirmed the final scope of the cuts, but the latest reports are painting a grim picture for Xbox. insider NateTheHate described the incoming layoffs as a "bloodbath" and said the constant chatter around Summer Game Fest was that the cuts would be significant.

"It's going to be a bloodbath -- lots of layoffs are expected across the entire Xbox division."
— NateTheHate

"The constant is that layoffs are going to be significant."
— NateTheHate

The most immediate concern is Compulsion Games, the Montreal studio behind South of Midnight and We Happy Few. Kotaku reported that Xbox plans to shut down the studio, while The Verge also noted the closure report and tied it to the broader Xbox reset. Bloomberg’s Jason Schreier reportedly added that Compulsion Games was informed on Friday about what is happening, but did not publicly explain the exact outcome. Kotaku later updated its report to say Compulsion leadership is trying to negotiate with Xbox, although the nature of those talks is still unclear.

The reports follow the recently published Xbox Reset memo from Xbox CEO Asha Sharma and Xbox content chief Matt Booty. The memo said Xbox will end the fiscal year at around a 3% accountability margin and admitted that, excluding Activision Blizzard King, Xbox spent more than US$20 billion over the past 5 years while annual revenue declined by nearly US$500 million.

"Going forward, this cannot continue."
— Asha Sharma and Matt Booty

The memo also said Xbox’s studio system had become overextended after years of shifting strategies across subscription, streaming, console, and device expansion. That language now looks more important as reports point to possible studio closures, restructuring talks, and more aggressive cuts.

Compulsion may not be the only team under pressure. Arkane Lyon has also been mentioned in reports as a studio facing uncertainty, although neither Microsoft nor Xbox has confirmed any closure plans for the studio.

If the Compulsion Games report is accurate, it would add to a painful pattern for Xbox. Microsoft already closed Arkane Austin, Alpha Dog Games, and Tango Gameworks in 2024, although Tango was later saved by Krafton. The Initiative was also shut down last year after the collapse of the Perfect Dark reboot.

That history is why the Compulsion report has landed so heavily. South of Midnight was one of Xbox’s more distinct creative projects, and its possible closure would raise serious questions about how much room Xbox still has for smaller or more experimental first party games. Xbox’s new leadership strategy, where the company signaled a renewed focus on major franchises, selected exclusives, and possible M&A. That direction may help strengthen Halo, Gears of War, Forza, Fallout, and Elder Scrolls, but it could also make smaller studios more vulnerable.

Xbox is trying to fix its business, but the human cost of that reset could be severe.

The numbers in the Xbox memo explain why Microsoft is acting aggressively. A 3% margin, declining revenue, rising hardware costs, and more than US$20 billion in investment without enough return would force any major corporation to rethink its strategy. But closing creative teams is not just a spreadsheet decision. Xbox has spent years telling players that its studio network was a strength. If that same network is now being cut down because the business model changed too many times, the damage to trust will be hard to repair.

Compulsion Games is especially symbolic. South of Midnight gave Xbox something visually distinct and culturally different from its usual blockbuster lineup. Losing that kind of studio would send a clear message that Xbox is narrowing its creative risk tolerance.

Microsoft may believe this reset is necessary. But if the result is fewer studios, fewer experimental games, and more dependence on only the biggest franchises, Xbox could become more sustainable while also becoming less interesting.

Do you think Xbox can rebuild its business without sacrificing the smaller creative studios that made its first party lineup more diverse?