Xbox's upcoming cost-cutting is inadvertently affecting third-party studios, leading to layoffs at a partner company.
Shortly after the reports that Microsoft planned mass layoffs at Xbox, third-party studio IO Interactive has made a surprising announcement: the 007 First Light dev is making layoffs as a result of Xbox's big new reset.
It turns out the rumors were true: Microsoft was indeed backing IO Interactive's new ambitious game, Project Fantasy. Microsoft pulled the funding on the project, directly reducing IO Interactive's revenue, triggering layoffs at the studio. Interestingly enough, Microsoft has since confirmed that it is not actually reducing its overall investment spending but instead being more careful in which projects that are funded.
IO Interactive announced the news:
"Today we have to share some more downbeat news. A relationship with an external partner on our own IP, Project Fantasy, has come to an end. This means we have to adapt to this new reality and its short-term consequences, including staffing decisions, which is what is happening as we write this update, and we are fully committed to supporting those affected through this challenging transition."
The game will still come out, though, and IO is still prioritizing its development moving forward:
"Project Fantasy is a game, a world, and an IP that we absolutely love and remain 100% committed to, now and in the future. This wonderful universe will see the light of day."
This development reflects how publishers are re-aligning their investments. We've seen major cancellations and funding pulled from various global studios, especially from NetEase, which has scrapped multiple groups and their associated projects.
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Will IO Interactive seek a new external partner or publisher to replace Microsoft's funding for Project Fantasy?
How might the layoffs affect the projected development timeline or release window for Project Fantasy?
Which parts of IO Interactive's team or operations are most likely to be retained to continue Project Fantasy development after the funding pullout?
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As early as May 2026, IO Interactive CEO Hakan Abrak had commented that Project Fantasy was "still in a healthy place."
