Layoffs have begun today at Compulsion Games, the Montreal-based Xbox first-party studio behind the critically acclaimed South of Midnight and We Happy Few, with multiple employees publicly confirming their departures on LinkedIn on Thursday — five days before Microsoft’s fiscal year closes on June 30. The cuts mark the first confirmed casualties of the Xbox Reset, the sweeping post-fiscal-year restructuring that new Xbox CEO Asha Sharma outlined in a public memo on June 10, and they arrive at a studio whose recent game drew more than one million players in its first three weeks on Game Pass — without generating the kind of revenue Microsoft’s internal accounting required to keep it open.
Dialogue director Sean Miller, principal 3D environment artist Paulette Richardson, narrative designer Bijan Stephen, and senior character concept artist Shelby Dela Cruz are among those who have confirmed their departures publicly. The full scope of cuts is not yet known, and layoffs were ongoing at time of publication.
What Is the Xbox Reset, and Why Is Compulsion Being Cut?
The story behind the layoffs begins with a number: $20 billion. That is how much Microsoft spent over five years on content, platform, and hardware subsidies for its Xbox division — not counting the $69 billion Activision Blizzard acquisition that closed in late 2023. Over the same period, the division’s annual revenue declined by nearly $500 million. Xbox hardware sales fell 29% year-over-year in Q1 2026 and 22% in Q4 2025.
In a memo co-signed with chief content officer Matt Booty and published publicly on Xbox Wire on June 10, Sharma acknowledged the division had become “overextended” by pursuing simultaneous strategies across consoles, PC, mobile, Game Pass subscriptions, and cloud streaming without concentrating resources on the franchise titles — Halo, Fallout, The Elder Scrolls — that anchor any of those strategies at scale. “Going forward, this cannot continue,” the memo read.
Read more:Xbox July Layoffs Confirmed as CEO Sharma Eyes Affordable Console Tier
Game Pass Accounting: Why Hitting a Million Players Wasn’t Enough
The specific mechanism that turned Compulsion’s audience success into a financial failure is documented. When South of Midnight launched day-one on Game Pass in April 2025, more than a million subscribers accessed it through their monthly fee rather than buying it at retail. That reach was real — the game won the BAFTA for Best New Intellectual Property, the Games for Impact award at The Game Awards 2025, and a Peabody Award the following spring. But the lost retail revenue, according to reporting by The Game Business co-founder Christopher Dring, was not charged against Game Pass’s own profit-and-loss statement. It appeared on Compulsion’s instead.
This accounting structure — sometimes called a weighted accountability formula inside Microsoft, according to Windows Central reporting — means a studio’s game can be played by millions through the subscription without those plays generating the commercial signal that Microsoft’s budget process uses to justify a studio’s continued operation. The result is a structural trap: Microsoft designed Game Pass, by Phil Spencer’s own stated rationale at its 2017 launch, as a home for experimental games that would struggle to find publishers under traditional retail models. Compulsion Games was exactly that kind of studio. Its closure is the consequence of an accounting system that cannot measure the value it was designed to create.
Rhys Elliott, head of market research at Alinea, stated that launching major titles day-one on Game Pass is “not really sustainable” specifically because of this cannibalization effect. Thomas Mahler, CEO of Moon Studios, the developer behind Ori and the Blind Forest, said the Game Pass software catalog was “just nowhere near good enough” to sustain subscriptions and described the day-one model as being “a little like Communism” in its removal of commercial incentives from developers.
What Happens to Compulsion Games Now?
The studio’s fate is not yet settled. Kotaku first reported on June 15 that Microsoft planned to close Compulsion outright; that reporting was independently confirmed by Insider Gaming using sources including senior studio employees. One source told Kotaku that studio leadership had entered “negotiations” with Microsoft over the studio’s future.
By June 25 — today — the picture has become slightly more complicated. While layoffs are clearly under way, Gameranx reported that Compulsion also has active job openings posted, suggesting that Microsoft may be restructuring rather than closing the studio entirely. What form any remaining Compulsion survives in — and how many of its current employees keep their positions — has not been confirmed.
Studio head Guillaume Provost, who founded Compulsion in 2009 as a handful of developers working out of a former gramophone factory in Montreal, has not commented publicly on the situation.
Read more:Xbox Plans to Shutter Compulsion Games: Award-Winning Studio Faces Axe in 2026 Reset
Ninja Theory, Double Fine, and the Wider Wave
Ninja Theory, the Cambridge studio that built the Hellblade franchise over a decade of critically acclaimed, mental-health-informed game design, was confirmed closed on June 16 — just nine days after its developers had stood on the Xbox Games Showcase stage to announce Senua, the franchise’s third entry, which had been scheduled for a 2027 release. Bloomberg reported that the Showcase placement was intentional: with Xbox already planning to exit the studio, the announcement was designed to attract potential buyers before the closure was disclosed publicly. Ninja Theory studio head Dom Matthews had described Senua as a franchise reinvention with all 85-plus developers focused on the project. Nine days later, those same employees were told the studio was ending.
Double Fine Productions, the San Francisco studio founded by Tim Schafer in 2000 and known for the Psychonauts series, is in active spinoff negotiations with Microsoft. The studio’s situation carries additional complexity: its 42 employees filed an NLRB union petition with the Communications Workers of America on May 7, seeking voluntary recognition from Microsoft. That petition adds a legal dimension to any potential spinoff or closure — and represents the first union drive at Xbox under Sharma’s leadership.
Bloomberg’s Jason Schreier has reported that Compulsion, Ninja Theory, and Double Fine are not the only Xbox studios currently at risk. The total scale of the July layoff wave has not been confirmed by Microsoft, but an estimated 1,000 roles across the Xbox division have circulated in industry reporting.
A Pattern Now in Its Third Consecutive Year
The Compulsion layoffs follow a now-familiar sequence. In May 2024, Microsoft closed Tango Gameworks — the studio whose Hi-Fi Rush had won a BAFTA approximately two months earlier — and Arkane Austin, the creator of the original Prey. Tango was later acquired by South Korean publisher Krafton, which also secured the rights to Hi-Fi Rush. Whether a similar rescue materializes for Compulsion remains to be seen.
In 2025, Microsoft conducted a company-wide reduction of approximately 9,000 roles, with the Xbox division absorbing a significant share. The current wave is the third consecutive year of major Xbox cuts, and comes despite Sharma’s own April remarks celebrating Compulsion’s work. “South of Midnight today won a Peabody Award, which I think is such a validation of the storytelling capability of games these days,” she told Game File in April, two months before the studio began losing staff.
Craig Duncan, who had led Xbox Game Studios for fewer than 20 months, resigned on June 15, the same day the Compulsion closure reports broke. Chief of Staff Louise O’Connor also departed. Microsoft has not named replacements for either. Until a successor is confirmed, Xbox studios report directly to chief content officer Matt Booty.
Microsoft did not respond to requests for comment. This article will be updated as the situation develops.
Frequently Asked Questions
What studios is Xbox closing in 2026?
As of June 25, 2026, Ninja Theory has been confirmed closed. Compulsion Games is undergoing layoffs and its final status remains under negotiation — reports as of today suggest Microsoft may be restructuring rather than fully closing the studio, though layoffs are confirmed. Double Fine Productions is in active spinoff talks with Microsoft. Bloomberg reporter Jason Schreier has stated that several other unnamed Xbox studios are also at risk.
Why is Microsoft closing Xbox studios?
Xbox CEO Asha Sharma’s June 10 Reset memo cited a $500 million revenue decline over five years, hardware cost increases, and an overextended studio system spread across too many strategies. The more specific structural cause is a Game Pass accounting model that removes per-unit retail revenue from studios whose games launch on the subscription service, making those studios appear commercially underperforming even when their games are widely played.
What is the Xbox Reset?
The Xbox Reset is the name Xbox CEO Asha Sharma and chief content officer Matt Booty gave to their June 2026 restructuring plan. Published publicly on Xbox Wire on June 10, the memo acknowledged Xbox had spent over $20 billion on content and hardware subsidies over five years while revenue fell, and committed to concentrating investment on flagship franchise titles including Halo, Fallout, and The Elder Scrolls.
Will South of Midnight still be available on Game Pass after Compulsion’s layoffs?
Games typically remain in the Game Pass library regardless of studio status. South of Midnight, We Happy Few, and the Psychonauts series are not expected to be removed from the service as a direct result of any studio restructuring. The more significant question is whether the Xbox model of sustaining diverse, story-driven first-party studios can survive under subscription accounting that does not credit studios for the audience reach they generate.
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Tags:Xbox Game PassMicrosoftNinja TheoryDouble Fine Productions
