Microsoft Xbox is planning to close Compulsion Games, the studio behind South of Midnight and We Happy Few, as part of a broader restructuring of its game studios [1, 2, 3, 4, 5]. Ninja Theory, known for Hellblade, is also set to close. Employees were informed on June 12, 2026, and the studio is seeking a buyer to avoid shutdown [6, 5, 7].
Double Fine, the developer of Psychonauts, may also close or be spun off from Xbox to avoid closure, although reports differ on its exact fate [8, 5]. Arkane Studios, creator of the Dishonored series, faces uncertainty with no official confirmation but growing employee concerns of a possible imminent closure [8, 9, 10, 5, 7].
These closures come amid recent management upheaval. Craig Duncan resigned as head of Xbox Game Studios in early June 2026 after only 18 months in the role [1, 3, 5]. New Xbox CEO Asha Sharma has warned of a "reset" involving studio closures and layoffs to address financial losses and overexpansion [1, 6, 2, 3, 4, 5]. Sharma said, "We expanded our studio system when we needed a pipeline of content to meet multiple strategies across subscription, streaming, and devices. In the process, we have found ourselves over extended as we executed on changing strategies in a landscape of more readily available content" [4].
Xbox's gaming business currently runs a slim 3% profit margin. Its annual revenue has dropped nearly $500 million over five years even as it invested $20 billion in gaming projects [1]. Satya Nadella, Microsoft CEO, emphasized the company’s need to innovate sustainably: "Now, we have to turn this into a sustainable business that delivers what is fundamentally one of the best sources of entertainment, still" [1].
Compulsion Games employed about 90 people, many of whom could be affected by layoffs [1, 2, 3, 4]. The studio’s flagship title South of Midnight launched in April 2025 to critical acclaim, winning a Peabody Award, a BAFTA for Best New IP, and a Games for Impact award [1, 3, 4]. Xbox Game Studios head Matt Booty called it "such a validation of the storytelling capability of games these days" [3]. Despite praise, South of Midnight sold poorly and peaked at fewer than 1,500 concurrent Steam players, struggling with low engagement and mixed reception among Xbox Game Pass users [11, 12]. It had a high $100 million development budget [12].
Ninja Theory had only released two games in eight years and faced long gaps between releases and mixed reviews, factors contributing to its closure [7].
The restructuring marks a shift from the expansion seen since Craig Duncan’s 2024 promotion to head Xbox Game Studios [5]. Ninja Theory announced a new game, Senua, on June 8 but was soon after told it faced closure [6, 5].
Xbox’s next major deadlines include ongoing efforts to find buyers for Ninja Theory and decisions on the fate of studios like Double Fine and Arkane. The restructuring will likely continue throughout 2026 as Xbox seeks to restore profitability.
