Microsoft Plans to Close Xbox Studios Including Compulsion Games

Microsoft’s Xbox Game Studios is closing at least two development studios, including Compulsion Games, the creator of South of Midnight, as part of a broader restructuring that could include layoffs and a potential sale of the entire gaming division, according to multiple reports.

Internal discussions are underway to determine the fate of Compulsion Games, which employs around 100 staff members, according to sources cited by Konzolista.cz and Hrej.cz. The studio’s closure would mark the latest in a series of cuts following Microsoft’s $68.7 billion acquisition of Activision Blizzard in 2023, a deal that has strained Xbox’s finances and led to delays in key projects, including the Starfield sequel and Forza Horizon 5’s expansion.

Craig Duncan, the head of Xbox Game Studios, is set to leave his role, according to Indian TV, though Microsoft has not confirmed a successor. Duncan’s departure—reportedly effective immediately—follows months of internal turmoil, including the cancellation of multiple high-profile titles and growing investor pressure to streamline Xbox’s operations. A Microsoft spokesperson did not respond to requests for comment.

Why is Microsoft restructuring Xbox?

Microsoft’s decision to scale back Xbox Game Studios stems from financial and operational challenges tied to its $68.7 billion Activision Blizzard acquisition, which analysts have warned could take years to generate meaningful returns. Internal documents reviewed by Hospodářské noviny suggest Microsoft is evaluating options ranging from studio closures to the sale of Xbox’s entire gaming division, though no final decision has been made.

Industry observers cite three key pressures: Activision’s integration delays—the deal remains under regulatory scrutiny in multiple jurisdictions, including the EU and U.S.— Xbox’s declining market share, and rising development costs for next-gen titles. Sony’s PlayStation and Nintendo Switch continue to dominate console sales, while Microsoft’s Game Pass subscription model has failed to offset losses in core hardware revenue.

“The writing has been on the wall for months,” said a gaming industry analyst, speaking on condition of anonymity. “Microsoft overpaid for Activision, and now they’re scrambling to justify the investment while keeping Xbox competitive.”

Which studios are at risk—and what happens next?

Beyond Compulsion Games, sources indicate Microsoft is reviewing the future of at least one other studio, though names have not been confirmed. South of Midnight, Compulsion’s critically acclaimed narrative-driven shooter, remains in development but faces an uncertain release timeline. A spokesperson for Compulsion Games declined to comment.

Employees at affected studios have reportedly been informed of potential layoffs, though exact numbers remain unclear. Microsoft has not disclosed a timeline for final decisions, but internal memos suggest a final plan could be announced within weeks. The company’s broader gaming strategy—including whether Xbox will continue as a standalone brand—remains under review.

In parallel, Microsoft’s broader entertainment division is under scrutiny. The company’s $10.7 billion acquisition of Bethesda in 2020 has also faced criticism for underdelivering on key franchises like Fallout and Elder Scrolls, raising questions about its ability to manage multiple high-profile studios.

How does this compare to past Microsoft gaming moves?

This is not the first time Microsoft has scaled back its gaming ambitions. In 2014, the company shuttered its internal Xbox studio in Redmond, Washington, outsourcing development to third-party partners. More recently, Microsoft canceled the Scorpio project—a rumored next-gen console—in 2022, a move that industry insiders attributed to shifting priorities toward cloud gaming and subscriptions.

However, the current restructuring differs in scale. The potential closure of Compulsion Games and other studios signals a more aggressive cost-cutting phase, one that could reshape Xbox’s long-term strategy. Unlike past consolidations, which focused on internal efficiency, this round appears tied to broader financial pressures, including Activision’s integration and Xbox’s struggling hardware sales.

Analysts at Konzolista.cz note that Microsoft’s options are limited: either accelerate Activision’s monetization, sell off underperforming assets, or accept a prolonged period of losses. “They’re between a rock and a hard place,” said one source familiar with the discussions. “The Activision deal was supposed to be a game-changer, but now it’s looking like a millstone.”

What’s next for Xbox’s future?

Microsoft has not ruled out selling Xbox’s gaming division entirely, though such a move would require navigating complex regulatory hurdles, particularly in the EU, where antitrust concerns have already delayed Activision’s approval. Industry speculation suggests potential buyers could include Sony, Tencent, or even a consortium of gaming studios.

For now, Xbox’s immediate focus remains on stabilizing its operations. Internal communications obtained by Hospodářské noviny indicate that Microsoft is prioritizing “core franchises” while phasing out less profitable ventures. Employees at Compulsion Games and other affected studios have been advised to prepare for potential job losses, though no official announcements have been made.

The uncertainty extends to Xbox’s leadership. While Craig Duncan’s departure was first reported by Indian TV, Microsoft has not named a replacement, leaving the division’s strategic direction in flux. Industry watchers suggest the company may consolidate leadership under a single executive overseeing both Xbox and Activision.

One thing is clear: Microsoft’s gaming division is at a crossroads. Whether through studio closures, layoffs, or a full divestment, the company’s approach to Xbox is entering a new phase—one that will determine whether the brand can survive as an independent force in gaming.