Microsoft blocked Rare from developing Killer Instinct 3 because it was "more interested in using [the studio] to help aim at a younger market", according to ex-Rare employee Donnchadh Murphy.
In a candid interview with NotEnoughShaders, Murphy, who worked at the studio between 1995 and 2009, revealed that "people were unsure of the future of Rare" after it was acquired by Microsoft.
"When they announced Microsoft was buying, a lot of people were unsure if it was a good or bad thing," he said. "For one, MS had deep pockets so financial security seemed assured, but on the other hand they were relatively new to the games market, and complete infants in the console market.
"Personally I don't think it was a great mix. At first it seemed that they wouldn't interfere much, but it was soon clear that they were more interested in using Rare to help aim at a younger market. This stifled a lot of creativity, Rare was renowned for their diverse portfolio, so to not be involved in making Mature games was a real blow."
Murphy suggests that Microsoft began to lose faith in the studio following the departure of the firm's co-founders, the Stamper brothers, in 2007.
"When the Stampers left it seemed that Microsoft was losing faith in Rare, it was hard to take when all around were incredibly talented people, with massive amounts of experience.
"There [were] numerous projects that were put forward that I believe would have been huge hits, but MS rejected them one after the other. I remember seeing a couple of prototypes that Chris Seavor had designed and was working on, that looked amazing, but alas they got shelved. It seemed that MS didn't want to take the risk in Rare doing anything outside the younger demographic, they quickly forgot the companies [sic] heritage. We started to lose a lot of great talent then, people were losing job satisfaction, so they just left."
And when discussion of Killer Instinct 3 came up, that decision to focus on a "younger demographic" blocked its development.
"We all wanted to make KI3, but Microsoft [was] more interested in broadening their demographic than making another fighting game. So it never got made, I doubt it ever will."
Rare was acquired by Microsoft in 2002 following the studio's successes with games on Nintendo's platforms, including Banjo-Kazooie, Donkey Kong 64, GoldenEye 007 and Donkey Kong Country.
The developer released Kameo and Perfect Dark Zero for the launch of Xbox 360, before focusing on games intended for family audiences, including Viva Pinata and Kinect Sports.