Fable: The Journey has done little to impress reviewers and has clocked up a series of mediocre scores.
Microsoft has made an undisclosed number of employees redundant from Lionhead. The company states that it is less than 10% of Lionhead's current headcount.
The job cuts come after Xbox Kinect title Fable: The Journey was completed and shipped. The latest instalment to the Fable series was released last week and has so far performed poorly, generating lacklustre review scores and poor sales.
Microsoft told Develop that the job losses were perfectly common for the industry stating that smaller teams are needed for the start of new projects.
Despite the job cuts, Microsoft is still intending to hire approximately 100 people across its UK studios over the next year. These studios include the aforementioned Lionhead alongside Soho Productions and Rare.
Microsoft also announced back in July that it is opening a fourth UK studio that is expected to have a focus on casual, free-to-play and tablet-based titles. It is scheduled to open its doors in November and recently recruited former Rare developer Lee Schunerman to head up the studio.
What Lionhead is currently working on is unconfirmed, but the studio is reportedly aiming for a 2013 release of Fable 4 and job adverts posted earlier this year suggest it is working on an MMO-style RPG for a hypothetical future Xbox console.
Lionhead co-founder, Peter Molyneux, left the studio in March to start up his own company, 22 Cans, although he remained on as a consultant on the recently released Fable title. He is currently building up for the release of 22 Cans' debut social experimental game hybrid Curiosity: What's inside the Cube? Molyneux reports the title is finished and undergoing Apple's app certification process.