The Xbox studio closures rumored this week have sent a chill through the gaming world, with reports indicating that three of Microsoft’s most celebrated development teams are fighting for their survival. South of Midnight developer Compulsion Games, Psychonauts creator Double Fine, and Hellblade studio Ninja Theory are all said to be at risk of being shut down, in what would mark one of the most turbulent stretches in recent Xbox history.

Compulsion Games at the Center

The most immediate concern centers on Compulsion Games, the Montreal-based studio behind We Happy Few and the acclaimed South of Midnight. According to Kotaku’s sources, the studio’s leadership is in negotiations with Microsoft over its fate, though the details of those talks have not been disclosed.

The human cost could be significant. While it remains unclear exactly how many positions are at risk, estimates suggest that more than 90, and possibly over 100, jobs could be affected. Reports indicate that employees have already begun searching for new work, with some taking to social media in the wake of the news.

The Crisis Spreads

What began as a story about one studio quickly expanded. Further reporting from Bloomberg’s Jason Schreier revealed that several Xbox studios are caught in similar crisis talks, with Double Fine and Ninja Theory both reportedly at risk.

The picture across the three studios is one of uncertainty and desperate maneuvering:

• All three are said to be in active negotiations to spin off from Microsoft and go independent, effectively buying themselves back from the company.
• Employees at several studios have been informed of the situation and given permission to seek new work, but were told the status of their teams remains in flux.
• Even if a studio successfully goes independent, heavy job losses are still considered likely.

The timing is especially jarring for Ninja Theory. The Cambridge-based developer only just unveiled a new game, Senua, at last week’s Xbox Games Showcase, with a release planned for next year. According to The Verge, Ninja Theory employees were told on Monday that the studio would be closing, though the team is hoping to find a buyer to stay operational.

A Pattern of Critical Acclaim Without Commercial Hits

A striking thread runs through all three studios: they are known for award-winning, original games that have not necessarily translated into blockbuster sales. This appears to be central to why they have landed on the chopping block.

South of Midnight, in particular, has been a critical darling. The game recently secured Game of the Year at the Gayming Awards and Best New Intellectual Property at the BAFTA Awards 2026. In April, Compulsion revealed it had even won a prestigious Peabody Award for “stories that matter,” with the studio reflecting on the heart required to tell stories rooted in folklore.

Double Fine, founded by Tim Schafer, is best known for the Psychonauts series and has shipped recent titles including Kiln, while Ninja Theory’s dark fantasy Hellblade games have earned widespread praise. Yet acclaim alone, it seems, has not been enough to shield them from a business prioritizing its biggest and most profitable franchises.

A Business Under Pressure

The potential closures fit into a broader story of strain within Microsoft’s gaming division. To mark her first 100 days as CEO, Asha Sharma wrote a blog post noting that, excluding Activision Blizzard, Microsoft has spent over $20 billion on Xbox in the past five years, even as revenue has dropped by roughly $500 million per year.

Sharma had earlier signaled trouble ahead, stating at a Bloomberg Tech conference that she planned on “resetting the business” because it was “not in a healthy spot.” Microsoft is also reportedly weighing further layoffs and has even been said to be considering spinning off Xbox as a separate entity or restructuring the games division as a wholly owned subsidiary.

Leadership Churn at the Top

The instability extends to Xbox’s leadership ranks. Earlier the same day the studio news broke, it was reported that Craig Duncan, the head of Xbox Game Studios, had departed the business after just eighteen months in the role. His chief of staff, Louise O’Connor, is also leaving, less than a year after joining.

This leadership shakeup, arriving alongside reported layoffs and studio closures, paints a portrait of a division in deep flux.

The Bigger Picture

For an industry already battered by waves of layoffs affecting thousands, the prospect of losing three more distinctive creative studios is a sobering one. The situation underscores how quickly consolidation by a platform holder can translate into studio-level uncertainty, even for teams celebrated with major awards and recent critical success.

It is worth noting that these reports remain unconfirmed by Microsoft, and the negotiations are described as ongoing and fluid. GamesIndustry.biz has reached out to Xbox for comment.

This is a developing story, and the coming days are likely to bring more clarity on the fate of Compulsion Games, Double Fine, Ninja Theory, and the talented teams behind them.