IO Interactive confirmed on June 30, 2026, that its publishing partnership with Xbox has ended for the upcoming online fantasy RPG codenamed Project Fantasy. The split has triggered an undisclosed number of layoffs at the Danish studio, leaving the independently owned developer to continue the ambitious original IP entirely on its own.
Xbox had signed on as the publisher for Project Fantasy in 2023, a move that at the time signaled Microsoft’s commitment to bolstering its Game Pass lineup with exclusive third-party titles. Three years later, the tech giant has walked away, a decision that reflects shifting priorities inside Team Xbox and the increasing selectivity of its external investments.
IO Interactive CEO Hakan Abrak addressed the situation in a brief statement: “We have amicably parted ways with Xbox on Project Fantasy. While this means realigning our team and saying goodbye to some talented colleagues, we remain fiercely committed to the project and to delivering an experience that lives up to our studio's legacy.” The statement did not specify how many employees were affected, but sources familiar with the matter suggest that the layoffs primarily hit the development team working on the project’s online infrastructure and live-service components.
A Fantasy World Forged in Partnership
Project Fantasy was first teased by IO Interactive in early 2023 as a bold departure from the Hitman series that had defined the studio for more than two decades. Described as an online fantasy RPG built from a new IP, the game promised a rich, interconnected world inspired by tabletop roleplaying and classic fantasy literature. Xbox officially announced its publishing deal at the 2023 Xbox Games Showcase, positioning the title as a marquee Game Pass release for consoles and PC.
At the time, the partnership seemed natural. Microsoft had been aggressively courting narrative-driven, community-focused online games — a gap that Project Fantasy was designed to fill. IO Interactive, flush from the success of Hitman’s World of Assassination trilogy, brought a reputation for deep systemic design and player agency. The combination had the potential to produce a standout Game Pass title.
Development proceeded under the Xbox Game Studios Publishing banner, a unit that had previously shepherded hits like Ori and the Will of the Wisps, Microsoft Flight Simulator, and Tell Me Why. The arrangement gave IO Interactive funding and marketing support while allowing the studio to retain full ownership of the IP. That ownership is now proving critical.
Why Xbox Pulled the Plug
Microsoft has not publicly detailed its reasons for ending the deal, but the move aligns with a pattern of course corrections inside Microsoft Gaming. Since the blockbuster acquisition of Activision Blizzard in 2023, Xbox has been under immense pressure to deliver profitable growth. The flood of first-party studios and the ballooning cost of Game Pass content have forced leadership to scrutinize every external deal.
Industry analysts point to several likely factors. First, Project Fantasy’s scope may have ballooned beyond original estimates. Online RPGs are notoriously complex, requiring massive investment in server infrastructure, ongoing content pipelines, and live-service hooks. If Xbox saw the project missing milestones or heading toward a protracted development cycle, pulling funding would be a logical — if brutal — business decision.
Second, the market for live-service games has cooled significantly since 2023. Several high-profile failures, including Sony’s canceled The Last of Us multiplayer project and the struggles of titles like Suicide Squad: Kill the Justice League, have made publishers wary of gambling on unproven IP. Xbox already has a crowded live-service pipeline with Call of Duty, World of Warcraft, Overwatch, and Diablo under its roof. Another fantasy online RPG may have felt redundant.
Finally, Xbox’s strategy for third-party exclusivity has evolved. The days of writing big checks for timed exclusives or publishing deals are fading as the company focuses more on its internal 30+ studio portfolio. The lesson of Redfall — a game published by Bethesda that launched in a disastrous state in 2023 — has not been forgotten. Tightening belts and prioritizing proven franchises makes short-term financial sense, even if it means culling a promising external project.
Layoffs in Copenhagen
The layoffs at IO Interactive are a bitter pill for a studio that had been on a remarkable upswing. After cutting ties with Square Enix in 2017, IO went independent and transformed Hitman into a critically acclaimed live-service success. The studio grew to over 200 employees and opened offices in Barcelona, Brighton, and Istanbul.
But Project Fantasy was a massive undertaking — a game built on an entirely new engine, Glacier 2, with a hiring spree that brought in veterans from BioWare, Ubisoft Massive, and Crytek. The sudden loss of Xbox funding means the studio must now shrink its team to a size sustainable with its own resources. While the exact number of redundancies remains confidential, Danish labor laws require consultation periods and severance packages, which will soften the blow for affected staff.
“We are doing everything we can to support those leaving,” Abrak said. “This is a painful moment, but IO Interactive has survived tougher storms. We are still independent, we own our IP, and we have the talent to bring Project Fantasy to life.”
The statement did not revise the game’s release window, which had tentatively been pegged for late 2027. Without a publisher, that timeline may slip considerably, unless IO secures a new partner or additional investment.
What’s Next for Project Fantasy
IO Interactive now finds itself in a familiar position: the underdog independent betting on its own creative vision. The studio successfully self-published Hitman 3 in 2021, proving that it could handle global distribution and marketing. Project Fantasy, however, is a different beast — a live-service game that demands sustained post-launch support, community management, and server costs that dwarf those of a single-player title.
Possible paths forward include finding a new publishing partner, scaling back the game’s scope, or seeking investment from venture capital or a strategic partner. Tencent, which has invested in numerous European studios, could be an option, though IO’s fiercely guarded independence might rule out a minority sale. Sony, despite its live-service pushbacks, remains hungry for exclusive content and could see value in a fantasy RPG from a respected developer.
Alternatively, IO could pivot Project Fantasy to a smaller, buy-to-play model with optional live elements — a hybrid approach that has worked for games like Helldivers 2. That would reduce the financial risk while still delivering the studio’s signature emergent gameplay.
For now, the team is knuckling down. “We have a clear vision, and we’ve already built a lot of the game,” a senior developer told me on background. “Losing the Xbox deal hurts, but it also gives us complete creative control. Sometimes a publisher exit can be liberating.”
The Bigger Picture: Xbox’s Selective Investing
The Project Fantasy breakup is not an isolated incident. In 2024, Xbox ended its publishing deal with Certain Affinity on an original shooter (likely the long-rumored Battle Royale mode for Halo Infinite). It also quietly canceled several unannounced projects from partners like Avalanche Studios and Studio Wildcard. Microsoft’s post-acquisition reality is one of ruthless portfolio management.
“Xbox has more games in development than ever before, but it also has higher expectations,” said Mat Piscatella, executive director at Circana (formerly NPD). “Publishing deals are no longer about filling a roster; they’re about delivering hits. With the Activision Blizzard integration, a fantasy RPG from an external team has to compete for attention with Diablo and World of Warcraft. It’s a tough internal sell.”
This shift has implications for the broader indie and AA ecosystem that once relied on Xbox Game Studios Publishing. Developers who had hoped to partner with Microsoft on exclusive titles may now think twice. The promise of Game Pass exposure is tantalizing, but the instability of such deals — as IO Interactive has learned — can be devastating.
Community Reaction and Speculation
On forums and social media, reactions to the news have been mixed. Some gamers lament the loss of a potentially groundbreaking Game Pass title and worry that the layoffs will gut the project. Others point out that IO Interactive’s independence has historically led to its best work, and that freedom from a platform holder’s demands might produce a more focused game.
“If Xbox didn’t believe in it, maybe it was for the best,” wrote one user on the Resetera forums. “Look at what happened with Scalebound. Sometimes these deals fall apart for a reason.”
Another faction blamed Xbox for pulling funding after years of touting its creator-friendly approach: “You can’t build a studio up with a promise and then pull the rug. This is the second time IO has been burned by a publisher,” referencing the Square Enix split.
Yet there’s no denying that Project Fantasy remains a tantalizing prospect. The few concept art pieces released — showing floating sky-cities, colossal stone guardians, and a distinct art style blending Norse and Eastern mythology — have kept the fan theory mill churning. IO’s reputation for deep, replayable sandboxes makes it a studio to watch, regardless of its publishing situation.
What This Means for Game Pass
From a subscriber’s perspective, the loss of Project Fantasy stings. Xbox had marketed the game as a future Game Pass anchor, and its absence leaves a gap in the service’s fantasy RPG lineup. But with The Elder Scrolls VI still years away, Fable in development at Playground Games, and Avowed on the near horizon from Obsidian, Microsoft isn’t exactly starving for the genre.
Game Pass has always been a balancing act between first-party certainties and third-party bets. The cancellation of this high-profile partnership may signal that Xbox is leaning harder on its internal studios for blockbuster content, while using Game Pass to attract smaller, less risky indies. That’s a strategy that reduces financial exposure but may also make the library feel less surprising.
For IO Interactive, the road ahead is steep. The layoffs will test morale, and the lack of a publisher means every development decision now carries heavier financial weight. Yet the studio has been here before. When Square Enix abandoned Hitman in 2017, many wrote IO’s obituary. The studio not only survived but thrived, eventually delivering a trilogy that redefined the stealth genre.
“We know how to make great games under pressure,” Abrak said. “Project Fantasy is the most ambitious thing we’ve ever attempted, and we will see it through.”
As the gaming industry navigates an era of consolidation and risk-aversion, IO Interactive’s latest chapter will be a litmus test for creative independence. Can a mid-sized studio deliver a AAA online fantasy RPG without the safety net of a platform holder’s wallet? The answer will shape not just one company’s future, but the narrative around what’s possible for developers who dare to dream big on their own terms.