IO Interactive cuts staff after Microsoft walks away from Project Fantasy

On June 10, 2026, Asha Sharma, three months into her tenure as Microsoft's gaming chief, and newly elevated content head Matt Booty sent a memo to staff warning of an "Xbox reset." By the end of the month, that reset had a body count in Copenhagen. IO Interactive, the Danish studio behind the Hitman franchise and the upcoming James Bond project, began laying off staff this week after Microsoft walked away from publishing Project Fantasy, a multi-game, multi-year initiative the Xbox parent had been bankrolling. The cuts land on a workforce that, until very recently, had been hiring against a roadmap stretching into the back half of the decade.

This is not, on its face, an unusual story. Big publishers trim studios. Studios that depended on a single commissioning partner trim back further when that partner pulls the plug. The unusual part is the pattern. Microsoft's gaming division is in the middle of its second major restructuring under Satya Nadella's tenure, and the IO cuts arrive on top of a broader Xbox portfolio review that has already claimed other projects and is widely expected to claim more before the summer is out. For the people losing their jobs at a studio that has, by most measures, been delivering the goods, the question is not which publisher sits at the top of the corporate org chart. It is which publisher, if any, picks up the phone next.

What Project Fantasy was

Project Fantasy is the internal codename for a slate of original games that Microsoft had been incubating through IO Interactive as a co-development partner. The arrangement gave IO the kind of multi-year runway that mid-sized European studios rarely get from publishers: budget security in exchange for exclusivity and a share of downstream revenue. According to The Verge's running Xbox reset tracker, the initiative sat inside the broader portfolio review Sharma inherited when she took the gaming seat earlier this year. Booty, the longtime Minecraft and Halo executive now running content, has been the operational point person on which projects inside that portfolio survive the reset and which do not.

When Microsoft "walks away" from a project of that scale, the language understates what actually happens. Walking away means the funding pipeline closes. Milestones stop getting signed off. The studio's cost base, sized for a multi-game slate, suddenly has nothing to amortise against. Headcount that was hired forward has to be hired back, or out. In IO's case, the studio had been openly recruiting into 2026 against a roadmap that assumed Microsoft's money would keep flowing. It did not.

The Danish studio in the room

IO Interactive is not a struggling outfit. The Copenhagen-based developer has been independent since 2017, when it parted ways with Square Enix rather than give up the Hitman IP. Since then it has shipped Hitman 3, the Hitman World of Assassination rebrand, the fantasy RPG Fable (developed under contract for Microsoft), and the Project 007 James Bond game currently in production. Its revenue has been climbing, its critical reputation has held, and its workforce has grown to several hundred across its Malmö and Copenhagen offices.

That record is what makes this round of cuts sting in a particular way. Studios that miss targets get cut. Studios whose games do not find an audience get cut. Studios whose partners lose confidence in the management get cut. IO's recent output argues, on paper, that none of those standard explanations quite fit. The studio was working. It was delivering. It had a James Bond licence that most publishers in the world would envy. It had a multi-year pipeline funded by the deepest pockets in the industry. Then one of those pockets closed, and the studio's runway contracted overnight.

The Microsoft pattern

The IO cuts arrive inside a reset that has already touched other parts of the Xbox portfolio. The Verge's Xbox reset tracker, updated as news develops, documents the shape of what is being walked back: cancelled projects, shelved concepts, studios whose roadmaps have been redrawn mid-flight. Microsoft is also testing a disc-to-digital conversion feature for its physical game library, a signal that the company is preparing to follow Sony's lead and stop producing physical discs for Xbox titles. That is a hardware-format decision with very long tail implications for the publisher-developer economics of the whole console ecosystem.

Two threads are worth pulling apart. First, this is a gaming division under new management making decisions a previous regime would probably not have made. Sharma took the seat after Phil Spencer's exit, and the reset memo went out under her and Booty's joint signature. Second, the discipline being imposed is the kind of discipline a parent company applies when it has stopped believing that gaming is a growth vertical worth subsidising. The Activision Blizzard acquisition, closed in 2023, gave Microsoft a content library sized for the cloud era. The bet that every internal studio needed to keep building at full throttle looks, from this vantage point, like a bet the new leadership is unwinding.

What the workers actually lose

Cuts at a studio like IO are not abstract. Danish games-industry employment has its own structure: full-time permanent contracts, strong union representation, generous severance by international standards. The people losing their jobs this week are not being thrown onto an open market with nothing. They are, however, being ejected from a project they were hired to finish, and the next employer is going to inherit a workforce that has to be re-anchored onto a new roadmap. That takes months. It takes budget. It takes a publisher willing to underwrite the rebuilding.

The other side of the severance coin is the project itself. A multi-game, multi-year initiative does not survive a mid-stream funding cut intact. Whatever was in active development gets frozen, archived, or quietly killed. If the IP stays with IO, the studio may yet revive elements of it on its own budget. If the IP is in any way encumbered by the Microsoft relationship, the next eighteen months will be spent in lawyers' offices rather than engine editor windows. None of that is good for the games, and none of it is good for the people who were making them.

The structural read

The wire line on this story, such as it is, has framed it as a Microsoft restructuring story with a Danish-studio lede. That framing is correct as far as it goes. It is also incomplete. Microsoft's gaming division is rebalancing away from a build-everything-in-house posture toward a thinner portfolio of higher-conviction bets, and the studios caught in that rebalance are paying the transition cost in jobs and in cancelled work. IO is one of the more visible casualties so far, partly because the studio has a public profile most internal Microsoft teams do not, and partly because the Hitman and 007 licences give journalists a hook.

The broader question is whether the studios that survive this reset end up in a healthier equilibrium, or simply a smaller one. Microsoft's argument, presumably, is that concentrating spend on fewer, higher-quality titles produces better returns than the splatter pattern of the last decade. That argument can be true on a spreadsheet and still leave a trail of competent people out of work in Copenhagen. Both things are happening at once.

Sources

• The Verge, Xbox's 'reset': all the news about Microsoft's looming layoffs and studio closures (2026-07-01)
• The Verge, Xbox testing disc-to-digital feature that digitizes a physical game collection (2026-07-01)
• Telegram: theverge_news, Xbox's 'reset' thread (2026-07-01)
• Telegram: theverge_news, Krafton settles with Subnautica 2 developer (2026-07-01)
• The Verge, AI won't save advertising, says Digitas' Amy Lanzi (2026-07-02)

Desk note: The wire framing leaned on Microsoft as the protagonist and IO as the scene. Monexus inverted the lede because for the workers losing jobs the question is which publisher carries the obligation next, not which publisher sits at corporate headquarters.