IO Interactive Confirms Layoffs After Xbox Ends Project Fantasy Partnership
IO Interactive has confirmed staff layoffs after its publishing partnership with Xbox for the in-development online fantasy RPG "Project Fantasy" was terminated. The studio announced the development on social media on Monday, June 30, 2026, stating the end of the relationship with an "external partner" necessitates adaptation to a "new reality" with "short-term consequences, including staffing decisions."
In its statement, the studio wrote, "A relationship with an external partner on our own IP, Project Fantasy, has come to an end." While not initially naming the partner, Xbox was confirmed as the publisher to Bloomberg on June 30, with a spokesperson stating the company is "taking a fresh look at where we invest so we’re focusing on our highest priorities." The end of this funding arrangement is the direct cause of the workforce reduction at the Hitman and 007 developer.
Despite the setback, IO Interactive emphasized its continued commitment to the project. "Project Fantasy is a game, a world, and an IP that we absolutely love and remain 100% committed to, now and in the future," the studio's statement continued. "This wonderful universe will see the light of day." The studio also pledged support for affected employees during this "challenging transition."
This confirmation aligns with previous reports linking Xbox to the title, then known as "Project Dragon," via documents from the 2023 FTC v. Microsoft court proceedings. The layoffs at the independent studio occur separately from but in proximity to broader expected cuts within Microsoft's Xbox gaming unit.
Microsoft Strategic Shift and Impending Xbox Gaming Unit Cuts
Microsoft's broader strategic shift is signaled by Xbox's withdrawal from Project Fantasy, with significant internal cuts across its gaming division expected to begin on July 6, 2026. This aligns with reporting from Bloomberg's Jason Schreier, who confirmed the end of the publishing partnership. Xbox stated to Bloomberg that while overall investment in games will remain stable, the focus is changing: “What’s changing is where we’re investing and the kinds of projects we’re backing,” a spokesperson said.
The move is part of a company-wide "reset for a stronger Xbox" hinted at by Xbox CEO Asha Sharma, according to multiple sources. This reset is anticipated to involve a wave of announcements starting the week of July 6, which could include studio closures and further job losses beyond the impact on external partners like IO Interactive. The decision to end funding for Project Fantasy appears to be a direct consequence of this refocused investment strategy.
The impending July 6 date for broader Microsoft gaming unit cuts was cited in the initial reports detailing IO Interactive's layoffs, framing the studio's situation within a larger, imminent corporate action. While Microsoft has not detailed the scope of these internal staffing decisions, the timing indicates a coordinated reassessment of its gaming portfolio and partnerships.
The Future of Project Fantasy: From Project Dragon to Online RPG
The project, previously known by the codename "Project Dragon," was first revealed as an "online fantasy RPG" and represents a major new intellectual property for the studio. According to a 2023 report by IGN citing leaked documents from the FTC v. Microsoft trial, the game was slated to be an Xbox and PC exclusive published under the Xbox Game Studios banner. This earlier codename, "Project Dragon," was first reported by Windows Central in April 2021 as a dragon-themed IP in development at IO Interactive with Microsoft.
CEO Hakan Abrak had long teased this ambitious new direction, referring to a "third universe" and a "love child" veteran developers had dreamed of creating. The studio formally announced the project, now titled Project Fantasy, in February 2023. In a statement at the time, IO Interactive described building a world "from the core to entertain players and expand for many years to come," signaling its live-service ambitions.
The recent termination of the publishing agreement with Xbox has forced the project into an uncertain new phase. Despite the setback, the studio's leadership remains publicly committed. "Project Fantasy is a game, a world, and an IP that we absolutely love and remain 100% committed to, now and in the future," IO Interactive stated on June 30, 2026. "This wonderful universe will see the light of day."
With Xbox's funding withdrawn, the future development path for the online fantasy RPG is now unclear. Reports indicate IO Interactive intends to continue the project, but must now seek alternative funding or move to self-publish the title, a significant challenge for a large-scale online game.
Financial Success of 007 First Light Amidst Studio Turbulence
Financial Success of 007 First Light Amidst Studio Turbulence
The recent layoffs at IO Interactive arrive in stark contrast to the studio's recent commercial success with its James Bond title, 007 First Light, which has sold over 3 million copies. This milestone was highlighted by the studio in its statement announcing the Project Fantasy partnership fallout, where it expressed being "humbled and honored by the response" to the game.
According to multiple reports, 007 First Light was described as the fastest-selling game in the studio's history following its launch just over a month prior to the layoff announcement. The game's strong performance, featuring a "young, unproven Bond" in a "bold new story," underscores the volatile nature of the games industry, where a major hit in one franchise does not insulate a studio from financial and strategic upheavals in another.
The success of 007 First Light demonstrates IO Interactive's continued viability and strong creative output in its established action genre, even as its ambitious new direction—the online fantasy RPG Project Fantasy—encounters significant funding and partnership challenges. The studio's current situation illustrates how external publishing agreements and strategic shifts at platform holders like Xbox can precipitate instability, regardless of a developer's recent track record.