Xbox is reportedly considering closing South of Midnight studio, Compulsion Games, with Double Fine and Ninja Theory also allegedly at risk

Xbox is allegedly shuttering We Happy Few and South of Midnight developer, Compulsion Games, with Tim Schafer's Double Fine and Hellblade developer Ninja Theory also reportedly at risk of closure.

According to Kotaku's sources 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." It's unclear how many positions are at risk or how many people could be impacted.

Further reporting from Bloomberg suggests "several Xbox studios" are in similar crisis talks, including Double Fine and Hellblade developer Ninja Theory, as management fight to spin off the studios to avoid closure.

GamesIndustry.biz has reached out to Xbox for comment.

To mark her first 100 days as CEO, Asha Sharma wrote a blog post in which she said that – excluding Activision Blizzard – Microsoft has spent over $20 billion on Xbox over the last five years.

She added that revenue has dropped by around $500 million per year. Microsoft's games arm is also reportedly planning for further layoffs, with Microsoft allegedly considering spinning off Xbox as a separate entity or restructuring the games division as a wholly owned subsidiary.

Earlier today, we also reported that Craig Duncan, the leader of Xbox Games Studios, has departed the business after eighteen months in the role. His chief of staff Louise O'Connor is also leaving, less than a year after joining.

South of Midnight recently secured Game of the Year Award at last week's Gayming Awards and Best New Intellectual Property at the BAFTA Awards 2026. In April, Compulsion revealed that the game also won a Peabody Award for "stories that matter," writing: "It takes heart and steadiness to tell stories rooted in folklore, stitched with xare to carry the weight of beauty and the truth of scars."

Double Fine - best known for its Psychonauts series - and Ninja Theory have also developed award-winning games.