Microsoft has withdrawn funding from a fantasy game being developed by Hitman and 007 First Light studio IO Interactive, while also considering the closure of Dishonored and Blade developer Arkane, as part of a broader cost-cutting initiative within its gaming division.
IO Interactive confirms layoffs after Microsoft deal falls through
In a statement posted on X on June 30, 2026, IO Interactive announced that a partnership with an external publisher on its own intellectual property, codenamed Project Fantasy, had ended. As a result, the studio is implementing staffing reductions. The statement read: '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.'
Although IO Interactive did not name the publisher, a Bloomberg report later identified Microsoft as the partner. An Xbox spokesperson told Bloomberg: 'We're taking a fresh look at where we invest so we're focusing on our highest priorities. We're not reducing our overall investment in games. We expect to invest about the same in content as we did last year. What's changing is where we're investing and the kind of projects we're backing.'
Arkane Austin at risk of closure; Blade delayed
According to The Verge, Microsoft is weighing the closure of at least five studios, including Arkane Austin, the team behind Dishonored and the upcoming Marvel's Blade. The report claims Blade is running over budget and its internal release date has slipped from later this year to late 2027. Microsoft is reportedly exploring selling off Arkane instead of closing it entirely.
Xbox boss Asha Sharma had previously promised a company 'reset', fueling speculation about widespread layoffs. Reports have indicated that other studios such as Ninja Theory, Double Fine, Compulsion Games, and Undead Labs could also be affected.
Project Fantasy not dead, but seeking new funding
IO Interactive emphasized that Project Fantasy is still in development and that the studio remains '100% committed' to the IP. The statement added: '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.' However, the studio will now need to secure funding from another publisher or self-publish the title.
Industry analysts suggest that Xbox's shift in investment strategy prioritizes established franchises. Reports indicate that Sharma wants to accelerate development on The Elder Scrolls, Halo, and Fallout, leaving original IP like Project Fantasy vulnerable.
Hideo Kojima's OD appears safe
One project that seems unaffected is Hideo Kojima's upcoming horror game OD, published by Microsoft. According to IGN, the title is 'set to survive' Xbox's reset, likely due to Kojima's reputation and the company's desire to maintain a positive relationship with the acclaimed designer.
The job cuts at Xbox are expected to begin on or around Monday, July 6, 2026, with industry observers warning that this could be the largest and most damaging round of layoffs ever seen in the gaming industry.
