Microsoft is reportedly preparing to close the studio behind the Peabody winning South of Midnight while the head of Xbox Game Studios and a chief of staff depart, the first reported cost of a 'reset' memo that warned the company had built too many studios.
Weeks after Xbox leadership publicly cited Compulsion Games' Peabody-winning South of Midnight as proof that the company's new-IP strategy was working, the studio is reportedly being closed. Kotaku reported Monday that Microsoft is preparing to shut down Compulsion, the Montreal-based team behind South of Midnight and the 2018 cult hit We Happy Few, with roughly 90 staff affected, a figure compiled from LinkedIn and social posts and not confirmed by Microsoft.
The closure, and the departures of Xbox Game Studios head Craig Duncan and chief of staff Louise O'Connor this week, is the first concrete cost of a strategic pivot Xbox's own executives named in writing. On June 10, Xbox CEO Asha Sharma and Xbox chief content officer Matt Booty published a memo warning that the company had "over extended" with its studio system, and that the next 100 days would rebalance toward a smaller, more exclusive lineup over the next five years. The Verge reported last week that a separate internal memo had already warned of a coming "reset," and that further changes could "involve a studio closure, or changes to the Xbox studio lineup."
"Over extended" is the phrase that matters. It is the rare case of a platform-holder diagnosing, in its own voice, that it bought and built too many studios for the pipeline it could sustain. The pivot now is narrower: keep the big franchises close, treat the rest of the portfolio as surplus.
The bet Xbox is making explicit is on two in-house games: Gears of War: E-Day, the next entry in Microsoft's flagship shooter series, and Clockwork Revolution, the long-teased role-playing game from Obsidian Entertainment. Both were recently locked in as Xbox console exclusives, a posture Sharma has also enforced by cutting the price of Xbox Game Pass Ultimate. If those two games sell, the trade-off looks disciplined. If either of them lands flat, "over extended" will read less like a clean diagnosis and more like a justification for cuts that were already coming.
The studio system Xbox is paring back is large. The Game Business reported Duncan's departure this week, citing an internal email from Duncan. According to The Verge, Duncan, who took over Xbox Game Studios in October 2024 after running Rare for roughly 14 years, oversaw more than 14 internal teams, including Halo Studios, The Coalition, Playground Games, Rare, Obsidian, Ninja Theory, Compulsion, The Initiative, Double Fine, inXile, Undead Labs, World's Edge, and Turn 10. Studio leaders will report to Booty until a replacement is named.
Closing Compulsion is the symbolic end of a particular pitch. As recently as April, Sharma and Booty praised South of Midnight's Peabody Award and BAFTA recognition for new IP in a public interview, framing the studio as proof that Xbox's portfolio strategy was producing differentiated work alongside titles from Double Fine and the upcoming Keeper. Two months later, that same studio is reportedly being closed under Sharma's tenure, even as Compulsion was actively recruiting for a new IP on LinkedIn as recently as April.
The human cost is not rhetorical. Roughly 90 people are now looking for work inside an industry that has spent the last two years laying people off in waves. O'Connor's exit removes a chief of staff who sat at the center of Xbox's day-to-day studio operations, and Duncan's removes the executive who, by Microsoft's own design, was responsible for keeping that portfolio coherent. Microsoft has not officially confirmed the closure, the staff impact, or the executive departures.
What "reset" actually means is the question worth watching. A reset can be a clean re-prioritization, in which case the kept exclusives are the message and the closed studios are the cost. It can also be a way for new leadership to disclaim the spending of the previous regime, in which case the kept exclusives are the test of whether the company is willing to back its own diagnosis with the same dollars it spent building the breadth it is now shrinking. For now, Compulsion is the receipt for the first reading. Gears of War: E-Day and Clockwork Revolution will be the receipt for the second.