Update 6/15: Bloomberg News is now reporting that the heads of multiple Xbox studios, including Double Fine, Ninja Theory, and Compulsion Games, are all actively negotiating to spin off into independent companies to preserve their future as the Microsoft video game subsidiary prepares to shut down some of its less-profitable game development shops.
These negotiations are not guaranteed to end in success, and employees at these studios have apparently been given permission to look for jobs elsewhere.
Even a successful reclamation of independence could still lead to layoffs at these companies, which would then also be operating without the funding and support promised by Microsoft.
Original story follows below:
Microsoft-owned Xbox and Microsoft Game Studios are reportedly looking to shut down South of Midnight and We Happy Few developer Compulsion Games—but studio leadership is reportedly ‘in negotiations’ over its potential fate.
This news comes from the team at Kotaku, who spoke with multiple sources aware of Xbox’s plans. After initial publication, one source informed Kotaku of the ongoing negotiations.
Few other details are available at this time, including the number of employees that would be impacted. The credits for South of Midnight list approximately 115 individuals under the list of “Midnight Internal” employees (the bulk of whom are assumedly from Compulsion Games). As Kotaku notes however, the studio has been recruiting for a “fascinating, intriguing brand new IP,” leaving the final number unknown.
Closing the Peabody award-winning studio would be a sharp about-face for Xbox CEO Asha Sharma and chief content officer Matt Booty, who both praised the studio and its role in Xbox’s strategy in an April 2026 interview with Game File. “We’re also dedicated to places where new IP can come to life and where these stories can be told,” Booty said.
Today’s news lands less than a week after Sharma sent a memo to all Xbox staff about the need for a “business reset” in Microsoft’s video game division, which was quickly followed by reports that the company is planning major layoffs in July. Then last Friday, Xbox insiders informed The Information that Microsoft is mulling over spinning off Xbox into a separate business unit, while company CEO Satya Nadella said the company must make Xbox a “sustainable” business.
In that interview, he declared that Microsoft had been “subsidizing that entertainment,” and not “monetizing” it.
Game Developer has reached out to Xbox for comment on this story and will update it when the company responds.
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