Xbox parts ways with 4 studios, with South of Midnight and Psychonauts devs going independent as Arkane begins "required consultation" to "review potential strategic options"

It's been confirmed that four Xbox-owned studios are breaking free from Microsoft ownership amid the "most significant restructure in XBOX history," while "required consultation" begins with management of Arkane. In a memo sent to Xbox staff today, CEO Asha Sharma reveals that South of Midnight studio Compulsion Games and Psychonauts developer Double Fine are both going independent. Meanwhile, Senua studio Ninja Theory and State of Decay dev Undead Labs will be getting new owners, while management of Marvel's Blade studio Arkane is "beginning required consultation with its Works Council to review potential strategic options." Sharma writes: "Compulsion Games and Double Fine Productions will return to management and transition to independent studios with their IP, catalog, and runway for their next games. Ninja Theory and Undead Labs have entered terms to join new ownership with funding to complete and grow Senua and State of Decay 3." This is an important email I sent today to all employees at XBOX:Team,We are beginning the most significant restructure in XBOX history. After careful consideration, I've made the difficult decision to reduce our team by approximately 3,200 throughout FY27. This will include…July 6, 2026 In the memo, Sharma admits that from 2018, "we have aggressively expanded our studio portfolio while the number of games created each month across the industry now outpaces the last ten years combined." Acknowledging that the company is competing "not only with the largest publishers, but also with smaller independent studios," Sharma says "it is neither possible nor desirable to own every great independent studio." All this comes as Sharma outlines plans to "reduce our team by approximately 3,200 throughout FY27," with around 1,600 members of staff being laid off today. "We are also making reductions across other units, and in some cases, shifting investment to focus on higher priority projects," she continues. "These changes vary in size across Activision, Bethesda/ZeniMax, Blizzard, King, Mojang, and XBOX Game Studios. None of our first party publicly announced games or projects are being cancelled as part of these reductions." Responding publicly to the news, Compulsion Games has issued a statement clarifying that it will "retain the rights to Contrast, We Happy Few, and our award-winning South of Midnight," and adding that it's "grateful for the years we spent with Xbox." It says: "As an independent studio, we're excited to continue building the distinctive games that define Compulsion while taking the next steps in our journey." Furthermore, Compulsion is "confident in the future" of the studio "and look forward to this next chapter where one thing will remain constant: we will create unique games that tell important stories, all with the goal of touching the hearts and minds of our players." Double Fine similarly shares its thanks to Xbox in a statement, both for its support over the years and "for working with us to reach an outcome which preserves our history and culture, and returns ownership of our games to us." An important update from Compulsion Games.— @compulsiongames.bsky.social (@compulsiongames.bsky.social.bsky.social) 2026-07-06T14:29:37.785Z All this comes following weeks of whispers that studios including Double Fine and Compulsion were under threat of closure. It was reported that Microsoft was already planning its split from Ninja Theory when its next game, Senua, was revealed at the Xbox Games Showcase only weeks earlier. For those three studios – as well as Undead Labs, which is set to release State of Decay 3 at some point next year – this outcome is quite a relief. Though undoubtedly still unsettling for staff – a number of Compulsion Games employees announced that they were looking for work only a couple of weeks ago – at least the studios aren't closing their doors. Things are less reassuring when it comes to Dishonored and Deathloop studio Arkane. Clearly, there'll be more news on its fate to follow, but "potential strategic options" doesn't immediately inspire confidence that the devs will be able to continue as normal. It was only a few weeks ago that lead concept artist at the studio, Jean-Luc Monnet, reassured fans that Marvel's Blade is still in development, but a report from The Verge last week which claimed that Microsoft was considering cancelling the game or selling the studio obviously wasn't so comforting. As reported last week, Obsidian Entertainment appears to be safe from closure amid the Xbox restructuring. [/url]

Jat AI

Jul 6, 2026 - 16:00

Xbox parts ways with 4 studios, with South of Midnight and Psychonauts devs going independent as Arkane begins "required consultation" to "review potential strategic options"

It's been confirmed that four Xbox-owned studios are breaking free from Microsoft ownership amid the "most significant restructure in XBOX history," while "required consultation" begins with management of Arkane.

In a memo sent to Xbox staff today, CEO Asha Sharma reveals that South of Midnight studio Compulsion Games and Psychonauts developer Double Fine are both going independent. Meanwhile, Senua studio Ninja Theory and State of Decay dev Undead Labs will be getting new owners, while management of Marvel's Blade studio Arkane is "beginning required consultation with its Works Council to review potential strategic options."

Sharma writes: "Compulsion Games and Double Fine Productions will return to management and transition to independent studios with their IP, catalog, and runway for their next games. Ninja Theory and Undead Labs have entered terms to join new ownership with funding to complete and grow Senua and State of Decay 3."

This is an important email I sent today to all employees at XBOX:Team,We are beginning the most significant restructure in XBOX history. After careful consideration, I've made the difficult decision to reduce our team by approximately 3,200 throughout FY27. This will include…July 6, 2026

In the memo, Sharma admits that from 2018, "we have aggressively expanded our studio portfolio while the number of games created each month across the industry now outpaces the last ten years combined." Acknowledging that the company is competing "not only with the largest publishers, but also with smaller independent studios," Sharma says "it is neither possible nor desirable to own every great independent studio."

All this comes as Sharma outlines plans to "reduce our team by approximately 3,200 throughout FY27," with around 1,600 members of staff being laid off today. "We are also making reductions across other units, and in some cases, shifting investment to focus on higher priority projects," she continues. "These changes vary in size across Activision, Bethesda/ZeniMax, Blizzard, King, Mojang, and XBOX Game Studios. None of our first party publicly announced games or projects are being cancelled as part of these reductions."

Responding publicly to the news, Compulsion Games has issued a statement clarifying that it will "retain the rights to Contrast, We Happy Few, and our award-winning South of Midnight," and adding that it's "grateful for the years we spent with Xbox." It says: "As an independent studio, we're excited to continue building the distinctive games that define Compulsion while taking the next steps in our journey."

Furthermore, Compulsion is "confident in the future" of the studio "and look forward to this next chapter where one thing will remain constant: we will create unique games that tell important stories, all with the goal of touching the hearts and minds of our players."

Double Fine similarly shares its thanks to Xbox in a statement, both for its support over the years and "for working with us to reach an outcome which preserves our history and culture, and returns ownership of our games to us."

An important update from Compulsion Games.

— @compulsiongames.bsky.social (@compulsiongames.bsky.social.bsky.social) 2026-07-06T14:29:37.785Z All this comes following weeks of whispers that studios including Double Fine and Compulsion were under threat of closure. It was reported that Microsoft was already planning its split from Ninja Theory when its next game, Senua, was revealed at the Xbox Games Showcase only weeks earlier. For those three studios – as well as Undead Labs, which is set to release State of Decay 3 at some point next year – this outcome is quite a relief. Though undoubtedly still unsettling for staff – a number of Compulsion Games employees announced that they were looking for work only a couple of weeks ago – at least the studios aren't closing their doors.

Things are less reassuring when it comes to Dishonored and Deathloop studio Arkane. Clearly, there'll be more news on its fate to follow, but "potential strategic options" doesn't immediately inspire confidence that the devs will be able to continue as normal. It was only a few weeks ago that lead concept artist at the studio, Jean-Luc Monnet, reassured fans that Marvel's Blade is still in development, but a report from The Verge last week which claimed that Microsoft was considering cancelling the game or selling the studio obviously wasn't so comforting.

As reported last week, Obsidian Entertainment appears to be safe from closure amid the Xbox restructuring.

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Xbox Is Making Huge Cuts As Four Major Studios Are Sold Off

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