Xbox Layoffs and Studio Closures: How the Success of South of Midnight Couldn't Save Compulsion Games
In June 2026, Microsoft announced extensive layoffs within its Xbox division as part of a corporate restructuring known as the "Xbox Reset." This move has raised concerns about the future of Compulsion Games, the studio behind the critically acclaimed Xbox Game Pass title, South of Midnight.
The Xbox Reset: Layoffs and Studio Closures Impacting Compulsion Games
According to Bloomberg, Xbox CEO Asha Sharma and CCO Matt Booty detailed significant cost-cutting measures in an internal memo. These include:
- Major layoffs impacting hundreds of employees across Xbox Game Studios
- Closure of at least three first-party studios, including Compulsion Games
- Shift toward "fewer, higher-impact titles" under Microsoft's new strategy for Xbox
The closures involve:
- Compulsion Games (creators of South of Midnight and Control DLC)
- Roundhouse Games (working on unannounced projects)
- Another unnamed studio specializing in cloud gaming initiatives
Compulsion Games: A Studio on the Brink Amid Xbox Changes
Despite South of Midnight being recognized as one of Xbox Game Pass's most innovative titles, Compulsion Games faced challenges due to Microsoft's changing priorities. Key issues include:
- High development costs for narrative-driven games like South of Midnight.
- Shifting focus toward live-service and esports titles within the Xbox ecosystem.
- Internal competition from Microsoft's $69 billion Activision Blizzard acquisition affecting Xbox Game Studios.
"A studio's creative success doesn't always mean it will be financially viable in today’s consolidation-heavy market," says gaming industry analyst P.J. McNealy.
South of Midnight: Critical Darling vs. Commercial Reality for Xbox Game Studios
The game's critical reception includes:
- 92/100 on Metacritic for its innovative storytelling in video games.
- Game Pass subscriber retention boost of 12% after launch, highlighting its impact on gaming subscriptions.
- NAVGTR Awards for Narrative Innovation in the gaming industry.
However, Microsoft's financial reports show some struggles in the gaming market:
- Game Pass subscriptions grew 8% year-over-year, yet they are still not hitting profitability for premium gaming titles.
- The Microsoft Gaming division faced a $3.2 billion operating loss in FY2025, raising concerns about future investments in gaming.