Xbox Is Shutting Down Compulsion Games Months After South of Midnight Won a Peabody Award

Xbox is planning to shut down Compulsion Games, the Montreal studio behind South of Midnight and We Happy Few, according to a report from Kotaku published June 15, 2026. This comes just months after the studio won a Peabody Award for South of Midnight, a game that Xbox CEO Asha Sharma and chief content officer Matt Booty were still publicly citing as proof of the platform's creative ambitions. The closure adds roughly 90 or more employees to the growing list of people Microsoft has pushed out of its gaming division this year.

What Compulsion Games Built

Compulsion Games spent the better part of a decade building a reputation for original, distinctly weird games. We Happy Few, their dystopian survival game set in a retro-futuristic British town full of drugged-up citizens, launched in 2018 after a long Early Access run. It was divisive but memorable, the kind of game that stuck with you for the atmosphere alone. South of Midnight arrived in 2025 as something more refined: a third-person action platformer set in the American Deep South, dripping with Southern Gothic folklore and stop-motion-inspired animation. The game drew real critical attention. It won a Peabody Award, one of the most prestigious honors in media, and also took home a BAFTA for Best New Intellectual Property. Those are not trivial achievements for any game, let alone a mid-budget Xbox exclusive.

The studio's LinkedIn page lists around 90 employees, though Kotaku reports the actual headcount is higher. Within hours of the news breaking, multiple Compulsion staff members began posting on social media looking for work. Just two months before the closure announcement, the studio's talent lead was advertising open positions on LinkedIn for work on a new IP. The studio was, by all appearances, looking ahead.

Microsoft Praised Them in April, Then Closed Them in June

The timing here is something else. In April 2026, Asha Sharma told Game File that Compulsion represented exactly what Xbox was trying to build. 'The Peabody Award for South of Midnight, Kiln coming out today. Like, I just feel like every day there's something wonderful there,' she said. Booty doubled down in the same interview, citing Compulsion alongside Double Fine as studios where new IP could come to life. He specifically called out the Peabody win as 'such a validation of the storytelling capability of games these days.' Two months later, that studio is reportedly being closed. That gap between public praise and private decision-making is jarring to watch from the outside, and it has not gone unnoticed by the community.

The Larger Xbox Collapse Playing Out in Real Time

Compulsion's closure does not exist in a vacuum. It lands on the same day that Craig Duncan resigned as head of Xbox Game Studios after less than two years in the role, a piece of news that alone would have dominated gaming headlines on any normal day. Earlier this week, Sharma and Booty published an open email to Xbox employees acknowledging the division's financial and operational struggles, with reports pointing to significant layoffs expected to begin in July. CriticalPixel covered the near-$500 million revenue drop and the job cuts already announced. The pattern here matches what Microsoft did in 2024 when it shut down Tango Gameworks, the Hi-Fi Rush studio, just months after that game became one of the most praised releases on Xbox. Compulsion is the latest studio to follow that same pipeline: make something critically acclaimed, get told you matter, get closed.

The broader Xbox strategy under Sharma is still being defined, but the decisions being made right now send a clear message about which studios are considered viable. The ones that ship massive franchises with guaranteed returns, Call of Duty and Minecraft, are safe. The ones doing original work at mid-budget scale are evidently not, no matter how many awards line the walls. Compulsion was exactly the kind of studio that should have gotten a second shot after South of Midnight. Instead they are apparently being cut loose while their next project was still in early development.

Community Reaction: Shock, Then Comparison

The response across social media has been strongly negative. Multiple replies to IGN's tweet called the decision absurd given the studio's recent awards. 'No way bro, seriously? After all the awards SoM won? We never even got a DLC or a sequel,' read one of the top comments. Others drew direct comparisons to the 2024 closures of Tango Gameworks and Arkane Austin, pointing out that Xbox shut down studios right after they had finished projects rather than waiting to see what came next. Community reaction is not unanimous, some found We Happy Few disappointing and thought South of Midnight had thin gameplay despite its strong atmosphere, but the consensus on the closure itself is that it reflects poorly on Microsoft's ability to nurture the studios it acquires.

What This Means Going Forward

Xbox did not respond to Kotaku's request for comment as of publication. That silence tracks with how Microsoft has handled previous closures, a brief statement after the fact or nothing at all. Compulsion was acquired by Microsoft in 2018, the same year We Happy Few shipped out of Early Access. The studio had about eight years under the Xbox umbrella. South of Midnight was their first game developed entirely within that structure, and by critical and awards measures, it was their best work. The studio's employees are talented people who built something genuinely distinctive, and they deserve better than this.

Microsoft keeps saying it wants to make great games. It keeps shutting down the studios that make them. At some point, those two things stop being a tension and start being a policy.