Xbox pulls out of Project Fantasy, forcing layoffs at IO Interactive
Microsoft has pulled Xbox's funding from Project Fantasy, the fantasy RPG in development at IO Interactive since at least 2023, forcing the Danish studio to conduct layoffs. Bloomberg's Jason Schreier confirmed the withdrawal on June 30, citing Xbox's broader strategic reset under CEO Asha Sharma. The timing is jarring: Xbox itself said in May that Project Fantasy was "very healthy."
The reset behind the cut
IO Interactive announced the news on its own social channels first, saying the project had lost its "external investor" and that staffing decisions were underway. The exact number of affected staff has not been disclosed. Microsoft framed the pullout as part of a wider effort to refocus spending, promising that its overall investment in gaming would remain constant — a claim that sits uneasily alongside the scale of what's happening across its studios.
The IO withdrawal is not an isolated move. Xbox is weighing the closure or sale of five creative studios: Compulsion Games (South of Midnight), Double Fine (Psychonauts), Ninja Theory (Hellblade), Undead Labs (State of Decay), and Arkane Studios (Dishonored, and the now-threatened Marvel's Blade). Microsoft has spent roughly $20 billion on Xbox content over five years while division revenue fell by nearly $500 million — a gap that appears to be driving the current cuts.
Dear gaming community,
— IO Interactive (@IOInteractive) June 30, 2026
For a good while, it has been all positive news from IO Interactive. We remain humbled and honored by the response to our latest outing with a young, unproven Bond. A bold new story and a take on one of the most famous characters in entertainment, which…
Project Fantasy itself dates back further than its current name suggests. FTC trial documents from 2021 show it was originally code-named Project Dragon and planned as an Xbox exclusive.
IO isn't walking away
IO Interactive says it has no intention of abandoning the project. In a statement, the studio was direct:
> "Project Fantasy is a game, a world and an IP that we absolutely love and are 100% committed to now and in the future. This wonderful universe will see the light of day."
The studio says it will seek an alternative publisher or self-publish. That search is likely to attract serious interest. IO arrives at the table with two proven franchises — Hitman and James Bond — and the credibility of 007 First Light, which launched to strong reviews in May 2026. Publishers including Sony, EA, and Take-Two have every reason to pay attention.
Xbox's pattern here is consistent. It previously pulled external funding arrangements with Romero Games and Avalanche, and the current reset signals a sharper focus on owned franchises: Halo, Gears of War, and Elder Scrolls. Smaller or externally-developed bets are being cleared out. For IO, that's a setback — but probably not a fatal one.
