Microsoft is preparing to shut down Montreal-based Compulsion Games, the studio behind the cult hit We Happy Few and the upcoming action-adventure title South of Midnight, multiple sources tell windowsnews.ai. The closure is expected to be announced as part of a broader restructuring of Microsoft's gaming division, a move that signals the company is reassessing its portfolio of acquired studios after a wave of high-profile cancellations and strategic pivots.
The decision, if confirmed, would make Compulsion the latest in a series of Xbox-owned studios to be shuttered or merged under the leadership of Gaming CEO Phil Spencer and Xbox Game Studios head Matt Booty. The rumored closure has already sent ripples through the gaming community, raising questions about the future of Xbox's commitment to narrative-driven, mid-tier experiences and the role of Game Pass in incubating creative risks.
Compulsion Games, founded in 2009 by former Ubisoft and Arkane developers, gained a devoted following with its debut title Contrast, a stylish puzzle-platformer set in a 1920s vaudeville world. But it was 2018's We Happy Few that put the studio on the radar of both gamers and Microsoft. A dystopian survival game set in an alternate-history England where a drug called Joy keeps the populace placid, We Happy Few drew comparisons to BioShock and garnered a cult following despite mixed reviews and a rocky early access period. Microsoft acquired Compulsion Games during E3 2018, folding it into Xbox Game Studios as part of an aggressive expansion that included Ninja Theory, Playground Games, Undead Labs, and later Bethesda and Activision Blizzard.
At the time, Spencer emphasized that Compulsion would be given the resources and creative freedom to “follow their passion” and deliver unique single-player experiences. “We want them to continue building games that are different, that push boundaries, that are works of passion,” Spencer said in an interview with GamesBeat. “We want to give them the time and the resources to do that.”
For years, Compulsion worked quietly on a new IP. In June 2023, during the Xbox Games Showcase, the studio revealed South of Midnight, a third-person fantasy adventure set in a supernatural version of the American Deep South. The reveal trailer, showcasing a stop-motion-inspired art style and a focus on mystical realism, earned praise from critics and fans alike. The game was positioned as one of Xbox's most ambitious first-party titles, with a release window targeted at 2025 or later. Pre-production had been underway since at least 2020.
Now, sources claim that South of Midnight has been “paused,” and that the closure could be announced as early as this month. Staff at the roughly 100-person studio have reportedly been informed of the decision, though severance packages are said to be generous. A formal announcement is expected after Microsoft's fiscal year-end results or the conclusion of its annual Game Developers Conference presence.
The reported closure aligns with a pattern of belt-tightening across Xbox's extensive studio network. In May 2024, Microsoft abruptly closed Tango Gameworks, Arkane Austin, Alpha Dog Games, and folded Roundhouse Studios into ZeniMax Online. The decision stunned the industry because Tango had just released the critically acclaimed Hi-Fi Rush, a game that was considered a creative triumph and a shining example of the kind of innovative, smaller-scale title Game Pass was meant to foster. Similarly, Arkane Austin's Redfall had struggled commercially but was still receiving post-launch support. Those closures followed layoffs that impacted 1,900 employees across Activision Blizzard, Xbox, and ZeniMax earlier in the year.
Industry analysts point to mounting financial pressures. Microsoft's $68.7 billion acquisition of Activision Blizzard closed in October 2023, leaving the company with a vastly expanded portfolio but also a need to justify the investment. Activision's live-service behemoths—Call of Duty, Candy Crush, and World of Warcraft—generate reliable revenue, but many of Xbox's other studios produce games that are years away from release and often cater to niche audiences. The pivot toward sustainable, high-margin models appears to be deprioritizing the kind of mid-budget, author-driven games that defined Xbox's “Studio of one's own” approach in the late 2010s.
Compulsion's We Happy Few was a divisive title: it scored a 64 on Metacritic and took years to fully deliver on its promises after a controversial early access launch that saw it banned from Australian shelves until it was reclassified. Yet the game sold over 3 million copies across all platforms, according to a LinkedIn profile of a former developer, suggesting a modest commercial success. South of Midnight, by contrast, was seen internally as a chance to redeem the studio's reputation with a more polished and original concept.
“South of Midnight looked like the game that could finally put Compulsion on the map alongside Remedy or Ninja Theory,” said a former developer who worked at the studio and spoke on condition of anonymity. “It was beautiful, weird, and had a strong voice. It hurts to see years of work just vanish because of a spreadsheet decision.”
The closure also raises concerns about Xbox's dwindling first-party output. The platform holder's 2024 lineup has been relatively sparse outside of Hellblade II (Ninja Theory), Avowed (Obsidian), and the upcoming Indiana Jones game (MachineGames). With Starfield having landed with mixed player sentiment in 2023, Microsoft needs a steady stream of compelling exclusives to drive Game Pass subscriptions, which have recently plateaued at around 34 million. Shuttering studios and shelving titles only exacerbates the perception that Xbox is struggling to convert its vast investments into a cogent first-party strategy.
Fans have reacted with dismay on social media and forums. The Compulsion Games subreddit has lit up with calls for Microsoft to reconsider. “This studio had so much potential, and South of Midnight might never see the light of day,” posted one user. Others drew parallels to the Tango Gameworks situation, where a beloved team was discarded right after shipping a critical darling. The hashtag #SaveCompulsionGames has begun trending in niche gaming circles.
Some industry insiders speculate that the closure is less about Compulsion's performance and more about a fundamental shift in Xbox's investment philosophy. Microsoft may be looking to reduce headcount without drawing antitrust scrutiny, divesting from studios that don't align with its future vision—one that increasingly revolves around mobile, cloud, and subscription-based live services. South of Midnight was a strictly single-player experience without a live-service component, making it a potential casualty in a pivot towards “games as platforms.”
If the closure proceeds, it would be the end of a 16-year journey for Compulsion. The studio's identity was steeped in Eastern Canada's indie roots, and its acquisition was once hailed as a sign of Microsoft's respect for creative autonomy. The shutdown would also leave Montreal—already home to major studios like Ubisoft Montreal, Warner Bros. Games Montreal, and Behaviour Interactive—without an Xbox Game Studios presence.
Microsoft has not yet responded to requests for comment. When asked about the recent studio closures at a town hall earlier this year, Matt Booty reportedly told employees that Xbox leadership had to make “hard decisions” to ensure the health of the overall business. “We have to focus on what drives the most impact,” he said, according to leaked audio obtained by IGN.
The reported closure of Compulsion Games is still based on unconfirmed reports, and plans could shift. However, if the past year has taught us anything, it's that even celebrated teams are not safe from corporate restructuring. For a platform that once positioned itself as the last bastion of single-player storytelling, the potential loss of yet another creative studio is a sobering reminder that the business of video games rarely rewards artistry alone.
As Xbox gears up for its summer showcase—likely to be held in June—the pressure is on to prove that its remaining studios can deliver the kind of world-class exclusives that sell consoles and retain Game Pass subscribers. The shuttering of Compulsion, if it comes to pass, will test whether fans and developers alike still believe in Xbox's creative vision.