South of Midnight Developer Compulsion Games Could Be the First Casualty of Xbox’s “Reset”

Compulsion Games, one of the five studios Microsoft acquired back in 2018 alongside PlayGround Games and Obsidian Entertainment, could be the first victim of the “reset” Xbox CEO Asha Sharma recently announced. Kotaku is reporting today that the Xbox team is planning to shut down the developer of South of Midnight and We Happy Few, though one source told the publication that studio leadership is currently in “negotiations” with Microsoft.

Asha Sharma, the new CEO of Xbox, recently acknowledged that Microsoft’s gaming business isn’t “healthy.” Multiple reports also hinted at another round of layoffs and possible studio closures at the beginning of Microsoft’s new fiscal year in July, and the company is reportedly considering even more radical options to turn its Xbox business around. Earlier today, the departure of the Xbox Game Studios’ head and Chief of Staff was also revealed by The Game Business, signaling that there may already be some internal turmoil within Microsoft’s gaming division.

In a separate report, Insider Gaming’s Mike Straw, who spoke with multiple sources at Compulsion Games, learned that there has been “worry” and “fear” for months within the studio. The reporter also shared earlier today that employees at Arkane Studios, which is currently developing the Xbox exclusive Marvel’s Blade, are also worried about their future.

Despite South of Midnight winning numerous awards, including the Games for Impact trophy at The Game Awards 2025, the game wasn’t a huge commercial hit for Microsoft. “We need smaller games that give us prestige and awards,” Xbox Chief Content Officer Matt Booty said during an internal meeting two years ago. However, that didn’t prevent the company from sunsetting Tango Gameworks, the developer of the critically-acclaimed Hi-Fi Rush.

Tango Gameworks was ultimately acquired by PUBG publisher Krafton, so maybe all hope is not lost for the talented people working at Compulsion Games. But all in all, it’s quite unbelievable to see so much bad Xbox news coming in such a short amount of time after Microsoft celebrated developers and its in-house talent during its Xbox Games Showcase.