Age of Empires Online, under the working title Project S, was to be the first game developed by Robot Entertainment, a company founded by 45 of the 110 former staff members of Ensemble Studios, who created the Age of Empires series. The game was officially announced on August 16, 2010. Robot Entertainment was hired by Microsoft to develop the game over a 24-month period. The entire studio team focused on it as their sole project, in an effort to earn startup funds for Robot Entertainment's future projects.

During early production, Age of Empires Online was originally called Age of Empires IV. The development team had noticed that over the years many other RTS game developers had moved away from the "economic game". The team felt that Age of Empires II: The Age of Kings had blended the economic and military aspects of the game perfectly, so they decided to play test it with hindsight. They noticed that many features from the game had been lost or changed over time for its successors. It was during this time the team decided to do an "Age of Kings style gameplay in an Age of Empires setting". The designers were surprised that fans of the series were most fond of the simpler aspects of the previous titles. Former Age of Empires II lead designer Ian M. Fischer stated: "When we started floating some of the early Age of Empires Online out to people other pieces fell into place – I cannot tell you how many times I have had someone e-mail me or talk to me at a show and mention how much they loved the villagers carrying big hunks of meat in the original Age or the priest wololo". From that point on, one of the goals was to invoke nostalgia from fans of the series when playing the game, despite the newer and updated features.

The decision to make the game online-only was based in part on the success of Age of Empires II and the popularity of its online integration with MSN Gaming Zone. Since online player interaction through the game was made a priority by the studio, two iterations of the game had to be created; a server version and a client version. This resulted in a heavily modified version of the BANG engine used in previous games of the series, along with requiring large amounts of additional server code and infrastructure to be implemented. Excluding the tools, Age of Empires Online contains over 1.2 million lines of code.

In designing the new look for the game, Robot Entertainment had six artists come together to create a new art style which would look similar to the previous games from the series, yet look more "visually appealing", "timeless", and "bright". Among the art team was Ensemble Studios' first artist Brad Crow, who had worked on every Age of Empires game produced by the studio. The team implemented several ideas to give the game an improved core visual interface over that of its predecessors such as; increasing the field of view so that the player was able to see more on the screen, a tighter user interface to allow more of the field of play to be visible, a new building design to make them encompass less screen space — while also making them look more recognizable, and giving each unit a unique look and animation making them more easily distinguishable from each other.

The music and sound for the game was developed by GL33k and veteran video game composer Chris Rickwood. In composing the music, Rickwood strove to keep it in the spirit of Stephen Rippy's and Kevin McMullan's work from the prior games of the series.

On February 24, 2011, it was announced - first via Chris Taylor's Facebook page - that Gas Powered Games had taken over development from Robot Entertainment. According to a blog post that appeared on the game's website, Gas Powered Games was already working on the game behind the scenes, creating content packs and moving to take over as lead developers, which was planned for some time. The game was released on August 16, 2011 with the Greek and Egyptian civilizations, followed by the Persians during the holiday. The Celts was postponed to March 2012, and was the first out of the four civilizations solely created from start to finish by Gas Powered Games since taking over development.