Microsoft is reportedly planning to shut down South of Midnight and We Happy Few developer Compulsion Games.
Kotaku reports that the layoffs may total more than 90 staff, just months after the Canadian studio was advertising jobs for a new IP. Microsoft has yet to comment. Compulsion Games also developed 2013’s Contrast.
In an update, Kotaku said one source indicated Compulsion leadership is in “negotiations” with Microsoft over the studio’s fate. It is not known where these negotiations may lead. IGN has asked Microsoft for comment.
The news comes just hours after it emerged that head of Xbox Game Studios Craig Duncan and chief of staff Louise O’Connor had left Microsoft after decades at the company.
South of Midnight, an action adventure game set in a fictionalized American Deep South, launched in April 2025 and while it was well-received by critics, it failed to find a significant audience. It launched on PlayStation 5 and Nintendo Switch 2 in March.
Just last week, new Xbox boss Asha Sharma warned of a company “reset” that most took as a signal that Microsoft planned big layoffs and studio closures. One analyst told IGN “the studios most exposed are brilliant for prestige and rotten for the spreadsheet.” Microsoft was then said to be speeding up development on new The Elder Scrolls, Fallout, and Halo games as it considered restructuring or even spinning off its gaming branch.
Sharma’s ground-shaking memo revealed that Microsoft’s gaming business currently has a 3% accountability margin (assumed to mean profit margin), which is down year-on-year. “Excluding Activision Blizzard King, over the past five years, we have spent over $20 billion on ongoing investments in our content, platform, and hardware subsidy, but our annual revenue has declined nearly half a billion during that time. Going forward, this cannot continue,” Sharma said.
Following the release of the memo, Microsoft CEO Satya Nadella said “there’s more monetization of Xbox games happening on YouTube” than at Xbox, adding the Xbox team needed to figure out how to “innovate both in hardware, as well as in the games, going forward in an economically viable way.”
“No one can accuse Microsoft of not having invested for the last 25 years,” Nadella said. “Now, we have to turn this into a sustainable business that delivers what is fundamentally one of the best sources of entertainment, still.”
Wesley is Director, News at IGN. Find him on Twitter at @wyp100. You can reach Wesley at [email protected] or confidentially at [email protected].
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