Xbox is facing renewed scrutiny over the future of its first-party games business, with reports suggesting Microsoft is preparing further studio cuts as part of a broader reset of its gaming division.
The latest reports centre on Compulsion Games, the Montreal studio behind South of Midnight, We Happy Few and Contrast.
Kotaku reported that Microsoft planned to close the studio, while later updates indicated negotiations were continuing between the parties.
The situation has raised speculation that Compulsion may be seeking a path back to independence rather than disappearing entirely.
Concerns now extend beyond one studio.
Separate reports have claimed Ninja Theory, best known for the Hellblade series, is also facing closure, while Compulsion Games and Double Fine are among Microsoft-owned studios said to be in active discussions about potential spin-offs.
Microsoft has not publicly confirmed the full position of each studio.
The public-interest issue is larger than another round of games-industry restructuring. Microsoft spent years buying creative studios to strengthen Xbox, Game Pass and its exclusive content pipeline.
Compulsion Games was acquired in 2018 during a major Xbox expansion that also included Ninja Theory, Playground Games and Undead Labs.
Now, several of those bets appear to be under review.
The timing is particularly notable because South of Midnight was not a failed creative project. The game won Games for Impact at The Game Awards and later claimed Best New Intellectual Property at the BAFTA Games Awards, giving Compulsion one of Xbox’s more distinctive recent critical successes.
The reported cuts follow a recent Xbox memo from Asha Sharma and Matt Booty, which said Xbox had become “over extended” across its studio system and needed to reassess investment priorities over the next five years.
The memo also cited weaker margins, rising hardware costs and heavy investment across content, platform and hardware subsidies.
For players and developers, the question is whether Microsoft’s gaming strategy is moving away from a broad slate of smaller, creative titles and back toward fewer, larger franchises.
For the wider industry, the concern is what happens when major platform holders acquire independent studios, reshape their business around subscription economics, and then decide those studios no longer fit the model.
Meanwhile, Xbox Game Studios boss Craig Duncan and chief of staff Louise O’Connor have both confirmed they are leaving their roles at the company.
The future of Compulsion Games, Ninja Theory and Double Fine may now become a test of whether Xbox’s reset is simply a financial correction, or a deeper retreat from the creative diversity it once used to sell the promise of Game Pass.
