007 First Light developer hit with layoffs as Xbox pulls out of Project Fantasy deal

IO Interactive is downsizing after a deal with Xbox fell through to fund its new online game Project Fantasy, but the developer says the project will live.

VIEW GALLERY - 2

Derek Strickland

Senior Gaming Editor

Published Jul 1, 2026 6:29 PM CDT

1 minute & 45 seconds read time

TL;DR: IO Interactive is laying off staff after Xbox withdrew funding for their new game, Project Fantasy, causing revenue loss. Despite this setback, IO Interactive remains fully committed to completing the game and supporting affected employees amid shifting publisher investment strategies.

Voice: DefaultSpeed

0:00 / 2:22

Xbox's upcoming cost-cutting is inadvertently affecting third-party studios, leading to layoffs at a partner company.

007 First Light developer hit with layoffs as Xbox pulls out of Project Fantasy deal 2

VIEW GALLERY - 2 IMAGES

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.

Read more: Xbox-funded Project Fantasy not cancelled and is 'still in a healthy place,' IO Interactive CEO says

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.

Frequently Asked Questions

TweakBot answers common questions about this article using TweakTown's own coverage from this page and related stories from our archive. Tap a question to reveal the answer, or type your own below.

Question 01

Will IO Interactive seek a new external partner or publisher to replace Microsoft's funding for Project Fantasy?

Click to reveal answer

Question 02

How might the layoffs affect the projected development timeline or release window for Project Fantasy?

The article says Microsoft pulling funding reduced IO Interactive’s revenue and triggered layoffs, but IO insists Project Fantasy will still be developed and “see the light of day.” It does not provide specific changes to the project’s development timeline or release window, only that the studio must adapt to short-term consequences including staffing decisions.

Answered

Question 03

Which parts of IO Interactive's team or operations are most likely to be retained to continue Project Fantasy development after the funding pullout?

IO Interactive says Project Fantasy will continue and that they remain 100% committed to the IP, so core development efforts are being prioritized. The article implies the studio will retain the teams and operations directly responsible for Project Fantasy development to continue the game despite the external partner relationship ending.

Answered

Question 04

Could the change in funding alter Project Fantasy's business model (e.g., live-service elements, monetization, or scope) based on IO Interactive's stated commitment?

IO Interactive says Project Fantasy "will still come out" and that they are "100% committed" to the game and IP, indicating they intend to continue prioritizing its development despite the lost external funding. The primary article does not specify any planned changes to live-service elements, monetization, or scope, so it is not stated that the change in funding will alter the game's business model.

Answered

Have a question not listed here? Ask below and TweakBot will answer it.