Microsoft is reportedly planning to shut down South of Midnight and We Happy Few developer Compulsion Games.
The Canadian studio was founded in 2009 by former Arkane developer Guillaume Provost as a work-for-hire unit. Its first game, puzzle-platformer Contrast, came out in 2013. Survival horror game We Happy Few followed in 2018, published by Borderlands company Gearbox. By then Microsoft had bought the company, bringing it under the Microsoft Studios (now known as Xbox Game Studios) umbrella.
Kotaku reports that the Compulsion layoffs may total more than 90 staff, just months after the studio advertised jobs for a new IP. In an update, Kotaku said one source indicated Compulsion leadership is in “negotiations” with Microsoft over the studio’s fate. It is not known where these negotiations may lead. IGN has asked Microsoft for comment.
The news comes just hours after it emerged that head of Xbox Game Studios Craig Duncan and chief of staff Louise O’Connor had left Microsoft after decades at the company.
South of Midnight, an action adventure game set in a fictionalized American Deep South, launched in April 2025 and while it was well-received by critics, it failed to find a significant audience. It launched on PlayStation 5 and Nintendo Switch 2 in March.
Just last week, new Xbox boss Asha Sharma warned of a company “reset” that most took as a signal that Microsoft planned big layoffs and studio closures. One analyst told IGN “the studios most exposed are brilliant for prestige and rotten for the spreadsheet.” Microsoft was then said to be speeding up development on new The Elder Scrolls, Fallout, and Halo games as it considered restructuring or even spinning off its gaming branch.
Sharma’s ground-shaking memo revealed that Microsoft’s gaming business currently has a 3% accountability margin (assumed to mean profit margin), which is down year-on-year. “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.
Following the release of the memo, Microsoft CEO Satya Nadella said “there’s more monetization of Xbox games happening on YouTube” than at Xbox, adding that the Xbox team needed to figure out how 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 added. “Now, we have to turn this into a sustainable business that delivers what is fundamentally one of the best sources of entertainment, still.”
Today’s news marks a significant U-turn on Xbox brand sentiment, after Sharma had started to turn core fans around with a number of crowd-pleasing changes, and a well received Xbox Games Showcase event in which The Coalition’s Gears of War: E-Day and inXile’s Clockworld Revolution were confirmed as console exclusives. The question now is whether the exit of Craig Duncan and the layoffs at Compulsion Games are the extent of the changes, or more cuts are to come.
Wesley is Director, News at IGN. Find him on Twitter at @wyp100. You can reach Wesley at [email protected] or confidentially at [email protected].
