Xbox in Crisis: Award-Winning Studio Compulsion Games Reportedly Shut Down as Two More Executives Depart

Just months after its critically lauded title South of Midnight claimed a Peabody Award and a BAFTA, Microsoft is reportedly closing the studio that made it. Compulsion Games, the Montreal-based developer acquired by Xbox in 2018, is said to be shuttered in a move that drew immediate concern from developers and analysts. The closure report landed on the same day two top Xbox executives, Craig Duncan, head of Xbox Game Studios, and Louise O'Connor, a longtime chief of staff, announced their departures. This is not an isolated round of cuts. It is the latest symptom of a deep, self-inflicted crisis at Xbox, where a decade of aggressive acquisition has given way to brutal contraction. Under new CEO Asha Sharma, the division is undergoing a "reset" after spending over $20 billion on content in five years, only to see declining revenue and a razor-thin 3 percent profit margin. How did Xbox go from celebrating critical triumphs to shuttering award-winning studios and losing its leadership?

Timeline: 2018, Compulsion acquired by Microsoft. April 2025, South of Midnight launches to critical acclaim. June 2026, Multiple outlets report closure is imminent.

The Compulsion Games Closure, A Critically Celebrated Studio Sacrificed

Compulsion Games was acquired by Microsoft in 2018 as part of a wave of studio purchases designed to bolster Xbox's first-party lineup. The studio released three titles over its history: Contrast (2013), We Happy Few (2018), and South of Midnight (2025). The latter was a breakout critical success, winning a Peabody Award in the Immersive and Interactive category and a BAFTA for Best New Original Game. For many, this was the kind of recognition that validates the long-term value of nurturing creative talent.

Yet according to reports from multiple outlets, including Kotaku, IGN, and Windows Central, Microsoft is now preparing to close the approximately 90-person studio. Staff have signaled on social media that they are looking for work, with writer Zaire Lanier among those publicly job-hunting. Microsoft has not officially confirmed the closure, but the consensus is that it is imminent.

Compulsion delivered exactly what Xbox said it wanted: critically celebrated original games that build brand prestige. But South of Midnight reportedly underperformed commercially, with poor Steam sales and mixed margins, making the studio a cost-cutting target. This encapsulates the painful math at the heart of Xbox's current strategy. A decade of spending billions on acquisitions has created an expectation of blockbuster returns. Mid-tier studios like Compulsion, even when they produce celebrated work, are no longer seen as viable in a system that demands every release justify its existence in profit-and-loss terms.

Executive Exodus, Leadership Vacuum at Xbox Game Studios

The same day the Compulsion closure broke, two key leaders announced they were leaving. Craig Duncan, who became head of Xbox Game Studios less than two years ago, is stepping down. Louise O'Connor, a Rare veteran since 1999 who served as chief of staff, is also departing. Their exits follow the retirement of longtime Xbox chief Phil Spencer and the resignation of President Sarah Bond in February 2026.

In their place, Asha Sharma, a Microsoft executive from the CoreAI division, not a gaming veteran, now leads the division. Matt Booty, recently promoted to Chief Content Officer, will temporarily absorb Duncan's duties, further centralizing power in a leadership team that lacks deep gaming roots. The simultaneous departures create a perception of both a cultural and strategic vacuum. For a developer ecosystem already reeling from repeated closures, the message is clear: Xbox's old guard is gone, and the new direction remains opaque. This exodus sets the stage for the financial reset outlined by Sharma, which promises even more radical changes.

The Sharma Reset, Financial Realities and Radical Changes

CEO Asha Sharma's internal memo, reported by multiple sources, laid out the harsh numbers. Xbox is ending its fiscal year at roughly a 3 percent profit margin. Over the past five years, the division has spent more than $20 billion on content. Revenue has declined by nearly $500 million. Sharma's message was blunt: "This cannot continue."

Bloomberg has reported that significant layoffs are planned for July 2026, after Microsoft's fiscal year ends June 30, with cuts expected to affect marketing and other budgets. Sharma has also hinted at "radically different" business models, citing hardware costs that have spiked fivefold. A next-generation console, codenamed Helix, is targeting a 2027 release, but the CEO has stated that Gears of War: E-Day and Clockwork Revolution will remain console exclusives, for now.

This "reset" marks a stark pivot from the aggressive acquisition era. Microsoft spent $68.7 billion to acquire Activision Blizzard in 2023, a deal meant to cement Xbox's content dominance. Now the focus is on lean operations, with talk of a streaming-first or licensing-heavy future. The shift is dizzying, and it raises serious questions about what kind of Xbox will emerge from this period of retrenchment.

A Pattern of Contraction, The Unraveling of Xbox's Studio Ecosystem

The closure of Compulsion Games is not an isolated event. It follows a pattern of systematic retreat from first-party development diversity. In 2025, Xbox shuttered The Initiative, the studio behind the Perfect Dark reboot. In 2024, Microsoft closed Arkane Austin and Tango Gameworks (though Tango was later revived by Krafton, which acquired the studio's IP and revived the Hi-Fi Rush franchise). Over the same period, Microsoft cut roughly 1,900 gaming jobs in early 2024 and 9,000 company-wide in July 2025.

The cumulative toll shows a company that acquired studios to build a rich portfolio but cannot sustain them. The promise of the 2018 acquisition wave, which included Ninja Theory, Playground Games, Undead Labs, and Compulsion, was that Xbox would nurture a diverse set of teams producing everything from blockbusters to experimental titles. Instead, the pressure to maximize Game Pass subscriptions and shareholder returns has turned that dream into a trap. Mid-tier studios are the first to go because they lack the scale of a Call of Duty or E