Three Xbox Studios at Risk of Closure, in Talks to Become Independent

Update #2 [Mon 15th Jun 2026, 9:30pm]: In another update, this time from Bloomberg journalist Jason Schreier, it's stated three Xbox first-party developers are at risk of closure and are currently in talks about being spun out to become independent.

Those three developers are Compulsion Games (We Happy Few, South of Midnight), Double Fine (Psychonauts), and Ninja Theory (Hellblade). Sources speaking to Bloomberg claim the studios are "in active negotiations to spin off as they try to thwart closure".

Update #1 [Mon 15th Jun 2026, 6:30pm]: This is a fast developing story, and Kotaku has just added the following update to its article:

“According to one source at the studio, Compulsion leadership is in ‘negotiations’ with Microsoft over the studio’s fate, but the details of these negotiations have not been disclosed.”

These negotiations could potentially culminate in the studio regaining its independence, although we’ll need to wait for further updates to know for sure.

Original Story: This weekend has been awash with rumours about incoming Xbox studio closures, as new leadership wrestles with an almighty mess.

While the speculation about the layoffs has been awful to witness on social media, Kotaku is now reporting that South of Midnight maker Compulsion Games will be among the first to fall.

Total job losses are unknown, although LinkedIn lists about 90 employees at the Montreal-based studio. It was acquired by Microsoft in 2018, months prior to the release of We Happy Few.

Various staff from the studio, including South of Midnight writer Zaire Lanier, have indicated on social media that they’re currently looking for work. It’s worth underlining that nothing has been officially announced as of the time of publication.

The Game Business reported earlier today that Xbox Game Studios boss Craig Duncan had resigned from his role less than two years after taking the job; Chief of Staff Louise O’Connor is also said to have left.

This weekend, CEO Satya Nadella said that Xbox needs to become a “sustainable business” following 25 years of subsidies, and jibed “there's more monetisation of Xbox games happening on YouTube than at Microsoft”.

South of Midnight, for what it’s worth, won multiple awards – including the Games for Impact gong at last year’s The Game Awards. It released on the PS5 earlier this year, where we described it as “the most beautiful simple game”.