David Sears says Xbox’s funding tap was unsustainable

Xbox would probably have turned off its development-funding “money tap” sooner, South of Midnight creative director David Sears said in a MinnMax interview. Asked whether he would have ended another studio’s funding before making South of Midnight, he answered: “Yeah, probably.”

That admission carries extra weight after Compulsion Games separated from Xbox this year. The studio’s 2025 launch, South of Midnight, earned critical acclaim but failed commercially, leaving its future dependent on the separation rather than another open-ended publishing arrangement.

What changed for Compulsion?

Microsoft acquired Compulsion in mid-2018 to strengthen the day-one offering for its Game Pass subscription service. The purchase formed part of a larger acquisition drive under Xbox head Phil Spencer. During that summer, Microsoft also added Playground Games, Undead Labs, Ninja Theory and Compulsion; inXile and Obsidian joined later in 2018.

Microsoft established The Initiative in Santa Monica during the same period to work on a rebooted Perfect Dark. It acquired Double Fine, developer of Psychonauts, in June 2019.

Compulsion’s departure now sits inside a broader reset led by Microsoft gaming CEO Asha Sharma. That reset has brought thousands of job losses, several cancellations and multiple formerly owned studios becoming independent. Compulsion retains ownership of its games and publishing rights despite leaving Xbox.

South of Midnight was Compulsion’s third game, following Contrast in 2013 and We Happy Few in 2018. Its launch came seven years after the studio’s previous release. A critical success can still fail to pay the bills. Commercial performance did.

Why Sears calls the funding unsustainable

Sears said he remained worried that Microsoft’s generous development funding would end and warned of “traumatic results downstream” if the company closed the financial floodgates. He also acknowledged that he might have stopped funding another studio first.

“I wanted to make [South of Midnight], no doubt,” Sears said. “Would I have turned off someone else’s money flow before South of Midnight? Yeah, because I'm not completely selfless. But in hindsight at least, it was unsustainable. So, of course it was going to have a shocking outcome.”

He recalled other directors asking how they had become so fortunate during what looked like a golden era for Microsoft-owned studios. Sears cautioned them that the arrangement was temporary, using his own maxim that every golden era eventually has its night when Rome burns. He did not know when the funding would stop.

Sears also credited Microsoft for treating its studios more humanely than the company he knew in the 1990s and early 2000s. His praise was qualified, not sentimental. The corporate DNA remained, but the execution had changed.

What does the reset mean for other studios?

Sears praised Microsoft for allowing studios to spin out instead of closing them. He contrasted that policy with Microsoft’s purchase of Ensemble Studios, which it later shut after only a couple of games.

Double Fine, developer of Psychonauts, and Undead Labs, developer of State of Decay, secured independence, as did Compulsion. Arkane Lyon, developer of Deathloop and Dishonored 2, is still seeking a buyer while Xbox explores options to separate the studio. Ninja Theory failed to find one and closed.

Microsoft’s response goes beyond individual studio sales. It has assigned development of the next mainline Halo game to Call of Duty maker Activision while layoffs hit Halo Studios. Age of Empires developer World’s Edge and Sea of Thieves developer Rare have also moved under the Activision umbrella.

The strategy concentrates Microsoft around major franchises as the company seeks higher Xbox revenue and a larger profit margin. For smaller studios, the practical issue is not whether a publisher has money. It is whether that money survives the next corporate reset.

Funding arrangements remain a live issue for developers in the Gulf. Abu Dhabi Gaming Connect brings funding experts to Yas Creative Hub on September 24, giving regional studios a forum to examine the terms behind those checks. The useful signal will be which funding structures survive Microsoft’s continuing reset.