Xbox Restructuring Deepens
Xbox Initiates Layoffs Amidst Microsoft Gaming Reset, Compulsion Games Staff Affected, Spin-Off Discussed
Key Points
More than 90 Compulsion employees could be affected by the restructuring, signaling a large-scale impact on the studio.
The layoffs are linked to an internal 'business reset' memo from Xbox's new CEO Asha Sharma outlining changes in Microsoft's gaming division.
Compulsion leadership has reportedly discussed spinning off the studio to operate as an independent company, amid broader restructuring.
Other Xbox studios, including Ninja Theory and Double Fine, are also cited as potential casualties in the ongoing reorganization.
South of Midnight, Compulsion's 2025 title, received solid critical acclaim at launch but did not move the needle for Xbox, contributing to the broader restructuring.
Layoffs at Xbox studio Compulsion Games — developer of the critically praised *South of Midnight* — began surfacing on LinkedIn on June 25, 2026, with at least 30 staff members publicly announcing they were let go, according to GameSpot and Eurogamer. The cuts appear to be the opening wave of a sweeping restructuring across Xbox Game Studios, with more than 90 Compulsion employees potentially affected.
The layoffs follow a June 10 internal memo from new Xbox CEO Asha Sharma, who outlined a "Next 100 Days: Xbox Reset" plan, citing an unsustainable 3% profit margin and a $500 million revenue decline over five years of $20 billion in spending, according to Insider Gaming. Other studios — including Ninja Theory and Double Fine — are also reported to be at risk.
Compulsion's Fate: Layoffs, Spinoff, or Closure?
Compulsion founder Guillaume Provost is reportedly in talks with Microsoft to spin the studio off as an independent company, according to GameSpot. But even if a spinoff succeeds, large-scale layoffs — estimated at over 90 staff — are seen as inevitable to make the studio viable for private investment. No official confirmation has come from Xbox or Compulsion as of June 25.
Employees who announced their departures on LinkedIn include narrative writers and artists. Their posts reflect a deep sense of betrayal. Compulsion swept the 2026 Canadian Game Awards, including Studio of the Year, just months before the cuts began, according to OpenCritic.
South of Midnight Won Praise But Lost the Numbers Game
*South of Midnight* launched in April 2025 to strong reviews and later came to PlayStation 5 and Nintendo Switch 2 in March 2026. It drew over 1 million players — mostly through Game Pass. But its Steam revenue was estimated at just $2 million, according to Sensor Tower data cited by Eurogamer. That gap between critical success and commercial impact put the studio in a vulnerable spot.
Industry analysts told OpenCritic that studios like Compulsion and Ninja Theory are "brilliant for prestige but rotten for the spreadsheet." Microsoft now demands that games drive massive subscription growth — not just good reviews. Smaller, experimental titles no longer fit that model.
Sharma's 'Reset' Memo Targets Xbox's Bleeding Bottom Line
Asha Sharma took over as Xbox CEO in February 2026, succeeding Phil Spencer. Her June 10 memo blamed a perfect storm of problems: Xbox hardware revenue fell 33% in the fiscal quarter ending March 2026, according to Microsoft financial filings cited by Insider Gaming. On top of that, memory and storage costs for Xbox hardware have risen fivefold since 2024 — partly because Microsoft's own AI division is consuming the same supply chain.
The departures of Craig Duncan, Head of Xbox Game Studios, and Chief of Staff Louise O'Connor on June 15 signaled that the reset goes all the way to the top, according to Playday. The memo's focus on the "next 100 days" has fueled speculation that Microsoft could eventually pivot to being a purely third-party publisher, with Bloomberg reporting a possible Xbox spinoff by the 2027 holiday season.
Ninja Theory and Double Fine Also Face Uncertain Futures
Compulsion is not alone. Ninja Theory — known for *Hellblade* — was told in mid-June that it faces a potential shutdown or sale, according to Eurogamer. Double Fine founder Tim Schafer is reportedly in negotiations to take his studio independent again to avoid closure, with Bloomberg identifying him as a key figure in the talks.
Microsoft is expected to refocus its first-party games around a handful of "megabrands" — *Halo*, *Gears of War*, *Fallout*, *The Elder Scrolls*, and *Call of Duty* — while cutting or outsourcing smaller projects, according to GameSpot. Some observers, including Bloomberg's Jason Schreier, argue that independence could be a "blessing in disguise" for these studios — though the human cost remains high.
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