Microsoft is shutting down Compulsion Games, the Canadian studio behind the critically acclaimed but commercially underperforming action adventure game South of Midnight. The closure will affect more than 90 employees, according to reporting from Kotaku.
South of Midnight launched in April 2025 to positive reviews but failed to gain traction with players. The game, set in a fictionalized American Deep South, arrived on PlayStation 5 and Nintendo Switch 2 in March. Despite critical praise, the title never found a substantial audience, making it a financial disappointment for Microsoft's gaming division.
Compulsion Games also developed We Happy Few and the 2013 puzzle-platformer Contrast. The studio had been actively recruiting for a new unannounced IP just months before the reported shutdown, suggesting internal plans had shifted dramatically.
According to sources cited by Kotaku, Compulsion's leadership is currently in negotiations with Microsoft regarding the studio's fate, though the outcome remains uncertain. Microsoft has not officially commented on the closure or the layoffs.
The move comes as part of a broader reckoning at Microsoft's gaming operation. Last week, Xbox boss Asha Sharma sent a memo warning of a company-wide "reset," signaling major restructuring ahead. That message was accompanied by stark financial data: Microsoft's gaming business operates on just a 3% profit margin, down year-over-year. The company has spent over $20 billion on gaming investments over the past five years while annual revenue has declined nearly half a billion dollars.
"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," Sharma wrote in her memo. "Going forward, this cannot continue."
The financial pressure is driving Microsoft to reevaluate its entire gaming strategy. CEO Satya Nadella pointed out an uncomfortable reality: more people are watching Xbox games played on YouTube than actually buying and playing them on Xbox hardware. The company is now focused on accelerating development of major franchises like The Elder Scrolls, Fallout, and Halo while considering whether to restructure or even spin off its gaming operations entirely.
The Compulsion Games shutdown also coincides with the departures of Craig Duncan, head of Xbox Game Studios, and Louise O'Connor, his chief of staff, both of whom had spent decades at Microsoft.
Analysts have noted that the studios most at risk during this period are those that generate prestige value but deliver weak financial returns. By that metric, a niche title like South of Midnight, regardless of its critical reception, fits the profile of operations Microsoft is now willing to cut.
Author Emily Chen: "South of Midnight proved that critical success alone isn't enough to justify a studio's existence in Microsoft's lean new era, and Compulsion Games is paying the price for a game that looked good on review aggregators but failed where it mattered most to the bottom line."
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