IO Interactive is laying off staff just weeks after shipping a 3-million-copy hit, after Microsoft's Xbox pulled funding for the studio's next major project.
Xbox exited a deal to fund and publish Project Fantasy, an online fantasy RPG the Danish studio announced in 2023, Bloomberg reported Tuesday. IO Interactive confirmed the split in a post on X, saying "a relationship with an external partner on our own IP, Project Fantasy, has come to an end." The timing stings. IO Interactive launched 007 First Light in May 2026 to strong sales, 3 million copies within weeks, per Polygon, and CEO Hakan Abrak told TechRaptor in an interview last month that Project Fantasy was in a "very healthy place." Now the studio is making "staffing decisions," its phrase for imminent layoffs.
"Project Fantasy is a game, a world, and an IP that we absolutely love and remain 100% committed to."
IO Interactive wrote. The studio plans to either self-publish or find a new partner.
Xbox told The Verge it is not cutting its overall game budget. "We expect to invest about the same in content as we did last year," the company said.
"What's changing is where we're investing and the kinds of projects we're backing." That distinction is cold comfort for IO Interactive. Project Fantasy was slated for Xbox Game Studios publishing, confirmed by documents from the 2023 Microsoft-FTC legal battle, as Rock Paper Shotgun noted. The deal's collapse follows a pattern: Microsoft ended funding for projects at Romero Games and Avalanche Studios in 2025, PC Gamer reported.
The pullout comes as Xbox undergoes a broader restructuring under new leadership. Asha Sharma took over the division earlier this year and has moved swiftly to cut costs and focus on profitability.
Reports indicate Xbox could close at least five studios and cancel its Blade game as part of a "reset" expected to begin in early July, right after Xbox's fiscal year ends June 30.
IO Interactive's fate highlights how quickly the ground can shift even for studios that deliver. A 3-million-copy debut and a "healthy" project pipeline weren't enough to survive Xbox's new math.
