Project Milo (aka Milo & Kate) was cancelled because the concept wasn't easily absorbed by Microsoft executives, and not because the game was technically unfeasible.
According to Molyneux at Game Developers Conference, “The problem with Milo wasn’t the ambition. It wasn’t the ambition or the technology; it was none of that. I just don’t think that this industry is ready for something as emotionally connecting as something like Milo."
Molyneux went on to say that Lionhead eventually canned the project because they felt like the industry "wasn't ready" for it.
"It was just the wrong thing. It was the wrong concept for what this industry currently is. Maybe this industry one day won’t be like that, but at this particular time, having a game that celebrates the joy of inspiring something and you feel this connection, this bond; it was the wrong time for that," he said.
The E3 2009 demo made quite a splash, as a woman interacted with a virtual boy named Milo, who not only could hear her but see her as well, with the ability to read her expressions and look at pictures she drew for him. However, rumors followed that the project had been cancelled, and Microsoft claimed that it wasn't a real game, just a tech demo for Kinect's capabilities.
However, Molyneux revealed that a lot of what went into Project Milo will be in Lionhead's upcoming Fable: The Journey. However, the developer is less than pleased with the compromise.
“There was a lot of technology that was in Milo that’s now in The Journey, but it’s just not this delightful celebration of youth,” Molyneux lamented. “What we were trying to achieve with Milo was this key thing: the most powerful story I could possibly tell is a story that reminds you of your own childhood. We’ve all had times in our childhood, common experiences when we felt down, and we felt up, or we celebrated doing something for the first time, and I loved that thought.”
Fable: The Journey is due to be released for Xbox 360 and Kinect later this year. Molyneux recently , the studio he founded, and joined a new studio, 22 Cans.