Microsoft Has Reportedly Shut Down South of Midnight Developer Compulsion Games
Microsoft is reportedly planning to shut down Compulsion Games, the developer behind South of Midnight and We Happy Few. According to Kotaku, the layoffs could exceed 90 employees, just months after the Canadian studio was actively hiring for a new intellectual property. Microsoft has not officially commented on the reports. The studio also worked on Contrast, a critically acclaimed puzzle platformer from 2013.
The Recent Fallout in Microsoft's Gaming Division
The news arrives just hours after it was revealed that Craig Duncan, head of Xbox Game Studios, and Louise O'Connor, chief of staff, had left Microsoft after decades of service. This follows a period of intense scrutiny and reevaluation within the company’s gaming division.
South of Midnight, an action adventure game set in a fictionalized version of the American Deep South, launched in April 2025. While it received positive reviews from critics, it did not achieve the commercial success Microsoft had hoped for. The game was available on PlayStation 5 and Nintendo Switch 2 in March.
A Reset and Restructuring
Last week, Asha Sharma, the new leader of Xbox, issued a memo warning of a "reset" in Microsoft's gaming strategy, which many interpreted as a signal for major layoffs and studio closures. An analyst told IGN that the studios most at risk are those with high-profile, prestige titles but poor financial performance.
Microsoft is reportedly accelerating development on upcoming The Elder Scrolls, Fallout, and Halo games as it weighs restructuring or even spinning off its gaming division. Sharma's memo highlighted that the gaming business currently has a 3% accountability margin, down from previous years.
"Excluding Activision Blizzard King, over the past five years, we have spent over $20 billion on ongoing investments in our content, platform, and hardware subsidy, but our annual revenue has declined nearly half a billion during that time. Going forward, this cannot continue," Sharma said in the memo.
A Call for Innovation and Sustainability
Following the memo, Satya Nadella, Microsoft’s CEO, commented on the need for greater monetization of Xbox games on platforms like YouTube. He emphasized that the Xbox team must find ways to "innovate both in hardware, as well as in the games, going forward in an economically viable way."
"No one can accuse Microsoft of not having invested for the last 25 years," Nadella said. "Now, we have to turn this into a sustainable business that delivers what is fundamentally one of the best sources of entertainment, still."
