Xbox’s overhaul faces turmoil as top executives depart and a renowned studio teeters on the brink of closure.

Things are looking rough for Xbox. Reports suggest that Microsoft might be closing down Compulsion Games, the studio known for titles like South of Midnight and We Happy Few. Current discussions are underway between the studio’s leadership and Microsoft regarding this potential closure. Compulsion Games boasts a team of over 90 developers. South of Midnight, which launched last year, received positive acclaim, winning a BAFTA for best new IP, a Peabody Award for its writing, and several animation awards at D.I.C.E. and other events.

This news follows the recent departure of Craig Duncan, head of Xbox Game Studios, who stepped down after just 18 months in the role. He was responsible for overseeing studios like Halo Studios, Rare, Obsidian, Ninja Theory, Double Fine, and Compulsion Games. Duncan had a long tenure at Rare, where he led the development of Kinect and Sea of Thieves. Additionally, Louise O’Connor, chief of staff at Xbox and a fellow Rare veteran, will also be leaving the company.

In a concerning message to the Xbox team last week, CEO Asha Sharma and Chief Content Officer Matt Booty highlighted the challenges the company faces. They noted that, excluding Activision Blizzard, Microsoft has invested $20 billion over the last five years but has seen a half-billion decline in revenue. They pointed out that hardware shortages and the complexity of their platform infrastructure have hindered game releases, emphasizing the need to enhance the value delivered to players while speeding up the process. Sharma previously mentioned that Microsoft would “reevaluate” its “approach to exclusivity,” suggesting a potential shift away from releasing Microsoft-published games on other consoles.

Additionally, there are reports of significant layoffs across Xbox, including cuts to marketing, with expectations that these layoffs could start as early as July. This raises concerns that Compulsion Games might be among the casualties.

While Microsoft has not disclosed sales figures for the Xbox Series X and its less powerful counterpart, the Xbox Series S, analysts estimate that the PlayStation 5 has outsold the Xbox by a margin of about 2:1. This disparity is partly attributed to Xbox’s difficulties in launching first-party games that attract players to its consoles. The potential closure of one of its few studios that successfully delivered a well-received game does not bode well for reversing this trend.

Microsoft is even contemplating spinning off Xbox as it looks to reinvest in its major IP under new leadership.