Several studios within Microsoft Corp.’s Xbox gaming division, including Montreal-based Compulsion Games and San Francisco-based Double Fine, are engaged in active talks to spin off as independent companies amid potential closures, according to individuals familiar with the matter. Cambridge, England-based Ninja Theory, known for the title “Hellblade,” is also reportedly in discussions with Xbox, alongside other studios at risk of shutting down.

Sources, who requested anonymity due to the sensitivity of the situation, indicated that these studios might have the option to buy themselves back from Microsoft and operate independently. However, this restructuring is expected to result in significant job losses. Employees at some affected studios have been privately informed of the uncertainty and have been given permission to explore other employment opportunities, though the final status of these studios remains undecided.

An Xbox spokesperson declined to comment on the developments.

The potential closures come as part of a wider reorganization under new Xbox chief executive Asha Sharma, who assumed her role in February. Last week, reports emerged that Xbox is preparing for substantial layoffs amid a decline in revenue and profit margins in recent years. In a memo to staff, Sharma described the division’s financial performance as unsustainable, emphasizing the need for a shift in strategy.

While Compulsion Games, Double Fine, and Ninja Theory have produced critically acclaimed titles, such as “South of Midnight” from Compulsion and the “Psychonauts” series from Double Fine, these successes have not translated into strong commercial performance. Microsoft’s renewed focus will favor large, established franchises as the company aims to rebuild growth in the gaming sector.

Compulsion Games released “South of Midnight” last year, while Double Fine launched smaller games “Keeper” and “Kiln” recently. Despite Xbox’s aggressive expansion, including its $69 billion acquisition of Activision Blizzard in 2023, the division faces significant challenges in aligning its portfolio with its new strategic priorities.

Craig Duncan, who formerly led Xbox Game Studios, stepped down last week ahead of the announced workforce reductions, sources confirmed. The timing of Duncan’s departure coincides with the company’s ongoing restructuring efforts under Sharma’s leadership.