IO Interactive loses Xbox funding for Project Fantasy, closes Istanbul studio amid layoffs

IO Interactive has confirmed layoffs and the closure of its Istanbul studio after Xbox pulled out as the external funding partner for Project Fantasy, the studio's in-development online fantasy RPG. The Copenhagen-based studio — best known for the Hitman trilogy and the recently released 007 First Light — says it has regained full ownership of the project and will continue developing it independently.

Xbox confirmed its involvement to Bloomberg, saying it is "taking a fresh look at where we invest so we're focusing on our highest priorities." A spokesperson added that Xbox is "not reducing our overall investment in games" but is shifting where that money goes. IO Interactive, for its part, posted a statement saying Project Fantasy is a world it is "wholly committed to" and that it "cannot wait to share the love." The studio had previously maintained five locations after rapid expansion — opening studios in Malmö (2019), Barcelona (2021), and both Istanbul and Brighton (2023). The Istanbul studio is now closing, and an unspecified number of employees across the broader company are being let go. IO says it is cutting "external projects and potential mobile game derivatives" to refocus on its core internal titles. Because the process is still ongoing, the studio hasn't given a final headcount for those affected.

The timing is brutal. 007 First Light launched just over a month ago to strong reviews and multi-million sales, and this is the reward: a funding collapse and studio closure. The Xbox pullout came one week before Microsoft announced sweeping cuts across its gaming division — 3,200 jobs gone, with 1,600 terminated immediately, and five studios spun off or sold: Compulsion Games, Double Fine, Ninja Theory, Undead Labs, and Arkane Studios. IO Interactive had been flagged as an Xbox partner years earlier via an FTC document leak, and sources confirmed to Kotaku that Microsoft was indeed the backer. There had been signs of trouble: earlier in 2025, Project Fantasy's online ambitions were reportedly scaled back following a prior round of Xbox cuts, though Microsoft stayed involved at the time.

The situation is made worse by what surrounds it — Amazon, which owns the James Bond license, declined to commit to bringing IO back for future 007 games shortly after First Light launched, and the long-gestating Hitman TV series was officially killed in March. IO is framing the restructure as a necessary step to survive as one of the few fully independent AAA studios, and insists Project Fantasy will still happen. Whether the community believes that after watching Xbox walk away remains to be seen.