Compulsion Games Set to Go Independent Amid New Xbox Layoffs Round
Compulsion Games is leaving Xbox Game Studios and returning to independent ownership, retaining full rights to Contrast, We Happy Few and South of Midnight as Microsoft confirms one of the largest restructures in Xbox’s history. The Montreal studio is one of four teams cut loose from Microsoft’s first-party stable this week, alongside Psychonauts maker Double Fine Productions, which is also going independent, while Ninja Theory and Undead Labs are being sold to new owners.
3,200 Xbox Roles Cut Through FY27, Four Studios Change Hands
The shake-up was laid out by Xbox CEO Asha Sharma in a memo to staff. The company will lay off 3,200 employees by the end of the fiscal year 2027, with 1,600 cuts happening today. The reductions sit inside a much larger Microsoft-wide move, as parent company Microsoft announced approximately 4,800 total job cuts across the wider company Monday, which includes the 1,600 from Xbox.
Sharma described the shift bluntly in her note to employees, framing it as “the most significant restructure in XBOX history”. She was direct about the scale involved, writing that she had “made the difficult decision to reduce our team by approximately 3,200 throughout FY27”, warning that a year-long restructuring creates additional challenges for staff and partners alike.
Compulsion Keeps Contrast, We Happy Few and South of Midnight
Unlike a closure, Compulsion’s exit is structured as a full spin-off. The studio confirmed the change directly, stating “Today, we’re sharing that Compulsion Games will return to independent management following our time as part of Xbox,” adding, “As part of this transition, we will retain the rights to Contrast, We Happy Few, and our award-winning South of Midnight.” Compulsion added that its near-term focus is on staff welfare, saying “Our immediate priority is to support our team throughout this transition period.”
Double Fine issued a similarly toned statement confirming its own return to self-management, writing simply “Once again, Double Fine Productions will be an independent studio.” The Psychonauts developer thanked its former parent for “seven great years together, and for working with us to reach an outcome which preserves our history and culture, and returns ownership of our games to us.”
Ninja Theory, Undead Labs Sold; Arkane Lyon in Limbo
Not every studio is walking away with its keys. Ninja Theory and Undead Labs are being sold to new ownership, with the identity of the buyers not yet disclosed. A fifth studio, France-based Arkane Lyon, faces a separate process: Sharma noted the Dishonored and Deathloop team is “beginning required consultation with its Works Council to review potential strategic options,” leaving the fate of its in-development Marvel’s Blade unresolved.
Sharma was explicit about the financial pressure driving the cuts, writing that Xbox’s “business today is not healthy,” and that the division is “operating at margins that are 3-10x lower than comparable platform and publishing businesses.” Despite the scale of the cuts, Xbox maintained that Xbox is not cancelling any publicly announced first-party titles despite a slew of layoffs.
From We Happy Few to First-Party and Back Again
Compulsion’s journey back to independence closes a loop that began years before Xbox came calling. South of Midnight was just Compulsion Games’ third outing after its founding in 2009, following Contrast (2013) and We Happy Few (2018), before the studio became a part of Xbox Game Studios when it was acquired by Microsoft in 2018. That deal turned a cult dystopian survival title into the foundation for a first-party partnership that ultimately produced South of Midnight, a supernatural action-adventure set in the American South that launched under Xbox’s banner.
Rumours that Compulsion’s future was in doubt had been circulating for weeks before Monday’s confirmation. Reporting had already flagged that Xbox is reportedly closing South of Midnight studio Compulsion Games after bragging about its award-winning developers earlier this year, a suggestion reinforced when multiple staff began signalling on LinkedIn that they were seeking new roles ahead of the announcement.
What Independence Means for South of Midnight’s Future
For Australian and New Zealand players who picked up South of Midnight through Game Pass or on Xbox storefronts following its 2025 release, the spin-off doesn’t change access to existing titles, but it does open questions about where Compulsion’s next project lands. Studios that regain their IP after leaving a platform holder typically gain creative freedom over budgets and design direction, but they also lose the built-in marketing push and day-one Game Pass exposure that first-party status provided — a trade-off that will matter for a small Montreal team competing for attention in an increasingly crowded release calendar.
Neither Compulsion nor Double Fine has announced a next project since regaining independence, leaving open whether either studio’s future games will still find their way to Xbox consoles and Game Pass subscribers or pursue a broader multiplatform strategy from day one.
Read also: id Software: Studio Still Has “Crew We Need” Despite Xbox Layoffs
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