The really truely honest-to-god reason, complete with full report and diagrams that show the timeline in simple bright colours, that explains exactly why MUO was cancelled will probably never be known by anyone outside of the circle of Cryptic, Marvel and Microsoft. Given that people see a mystery there filled with unanswered questions - notably why was MUO cancelled and who should shoulder the blame? - it shouldn't be surprising that a lot of rumours have rushed to fill the void. Given that I've seen some pretty wild and wacky rumours surrounding MUO's cancellation - some people have a weird idea how buisness works - I thought I'd summarise the three most belivable theories for why MUO was cancelled.
The Theory: It was Cryptic's fault!
The Summary: MUO was cancelled because Cryptic was delivering a product that was sub-par to Marvel / Microsoft. MS / Marvel killed MUO rather than have it embarrass them / cost them any more money.
The Supposition: When 1up first broke rumours of MUO being cancelled, they also received a leak that indicated MUO may still have required a lot of development work before it could ever launch. Given that the project had been in development for about 14 months by the time that rumour came out, it could be expected that perhaps things were in better shape.
There have also been some rumours that those overseeing the MUO project from MS / Marvel didn't like the art direction / appearance of the game, but it's hard to know how accurate that information is since no-one has gone on record.
Who Believes This Theory: This theory tends to have most traction among those who already dislike City of Heroes / Villains (CoH/V), Cryptic Studios or (most likely) Cryptic's Chief Creative Director Jack Emmert.
The Kernal of Truth: It's very possible that MS / Marvel was turned off by the art direction; the comic shading look that Champinons Online (ChampO) currently sports probably came from MUO development decisions and it does look very distinctive. It also doesn't look like the other games that top the Xbox 360 sales, which typically have pseudo-realistic art direction with highly detailed models, which may have been a turn off to MS executives.
There is also the possibility that the Xbox Live architecture was causing the development of the project problems, since there is enough circumstancial evidence out there to suggest that Live may not scale well to MMO levels (e.g. True Fantasy Online was allegedly cancelled due to network issues).
Overall Probability of Accuracy: 2 / 10. Ultimately, if it was all Cryptic's fault, Marvel / MS would have dumped the blame at their door and given the license to another MMO developer. That MUO was stopped point blank appears to indicate that the problem came from another party.
The Theory: It was Microsoft's fault!
The Summary: Microsoft Game Studios did what they always do and kill a MMO that has real potential. Given that the MMO market for the Xbox 360 and Vista are pretty unknown quantities, there were no guarantees that MUO would succeed, so Microsoft cancelled it despite the money they'd poured into the project.
The Supposition: When Shane Kim spoke about the reasons that MUO had been cancelled, he stated that (in summary) MUO wasn't expected to make the kind of money it would need to in order to justify its continued development. A lot of people (including myself) thought he was saying that any MS MMO would need to achieve WoW-levels of success in order to be worth doing, but there is a chance that he could have also been talking about the only MMO currently on the Xbox 360 - Final Fantasy XI. The only figures I can see for FFXI regarding player population is 500k, with no deliniation between Xbox 360, PC or PS2 players, but it's quite possible that MS thought they weren't guaranteed of reaching 500k players so the project wasn't worth while continuing. It's also clear that Shane was looking at micro-transaction models as a way of driving revenue - a payment model that generally hasn't been successful / adopted among Western gamers.
Who Believes This Theory: I would say, "People who believe that Microsoft is equal parts evil and incompetent", but that hardly narrows it down. So I'll say it's the people who believe that Microsoft doesn't understand the MMO industry are the ones most likely to believe this rumour.
The Kernal of Truth: Microsoft is a big company. They want big hits. While I don't think anyone there sensibly thinks that MUO would beat WoW in terms of players it attracted, they would want a MMO with at least 1 million subs to show off in front of SOE. However, when you think of the MMO player base, limiting those subs to only Vista-owners - a small subset of PC owners - and Xbox 360 owners - a largely untested MMO market - that 1m subs looks pretty hard to obtain.
Overall Probability of Accuracy: 5 / 10. Microsoft couldn't guarantee that MUO would end up on the right side of the spreadsheet, so it wasn't worth taking that risk despite the money already invested.
The Theory: It was Marvel's fault!
The Summary: Despite Marvel having a contract that gave Microsoft Game Studios the license to develop the Marvel MMO, Marvel was being difficult regarding exactly what the MMO could contain and how it could play. Certain characters were already potentially licensed out to other software developers while Marvel was concerned that letting any l33t ub3r g4mer play as Spider-Man in a public space could damage their intellectual property (IP). Eventually Microsoft and Marvel hit a point they couldn't overcome and canned MUO.
The Supposition: The Game Informer article about Champions Online did some digging and came up with the following (from page 58 of the March 2008 issue, I believe):
"We contacted all the parties involved with the Marvel MMO regarding the project's cancellation. Cryptic told us: "Cryptic and Microsoft amicably terminated the development agreement, which was necessitated for reasons beyond our control. We still have a good relationship with Microsoft and continue to support the Xbox 360." Meanwhile, Microsoft gave us this comment: "Microsoft and Marvel have jointly decided to discontinue development of their massively multiplayer online game featuring Marvel Characters, which Microsoft had been developing under the name Marvel Universe Online. The decision was reached amicably by Marvel and Microsoft. The two companies remain partners on many ventures and hope to pursue additional collaborative efforts in the future." As of press time, Marvel had no direct comment for us. Independent of bleached-clean official statements, an anonymous source tells us that licensing disagreements between Microsoft and Marvel are the reason why the exciting game concept hit a brick wall. In addition, it's clear that MUO represented a major investment from Microsoft, so it's mard to take comments on an amicable split seriously. time will tell if the relationship between the two massive media companies is as sunny as they would have the public believe."
Another aspect could be that Marvel's lack of real knowledge about MMO development could see them only considering the largest of MMOs (e.g. WoW) and wanting that kind of audience. Since it's pretty unlikely that any MMO is going to get that audience size in the near future, the folks at Marvel may not have seen MUO as worth continuing, so did what they could to scuttle the project.
Finally, Marvel is doing more than ever to maintain their control over their IP. They've already brought their movies under the control of an internal division and have just announced (or are at least ramping up) Marvel Interactive, which looks to do the same things with their video games. It would certainly be a jewel in the crown of Marvel Interactive to take the lead on a Marvel MMO right off the bat, given that it could contain all of the 5000-odd existing Marvel characters.
Who Believes This Theory: People who already dislike Marvel and / or Marvel video games; people who believe Marvel is trying to be a lot more controlling about their IP / characters than ever before.
The Kernal of Truth: Marvel considers its IPs to be mainstream blockbusters thanks to the success of its movies. It doesn't want to see a game that features all of its key characters left with a paltry audience if MUO wasn't successful... especially with SOE's DC Online rumoured to be close to a major announcement. After years of selling IPs for cash and regretting it, it looks like Marvel is swinging the other way and bringing as much as possible under their direct control... possibly including MUO.
This does mean that Marvel has no MUO in the short term, but it does avoid them having to deal with its potential 'failure', at least by their standards. Of course, if MUO had been successful, profits would have to be split between Marvel, Microsoft and Cryptic. Why do that if you could get all of the profits yourself?
Overall Probability of Accuracy: 7 / 10. Marvel wanted control of what could be a major cash cow back in-house, so they got MS to give up on MUO.
Of course, as with all situations, it's unlikely that any party can be considered blameless. If Cryptic had delivered an ultra-awesome DirectX10 art design game that was an easy internal sell, if Microsoft had been willing to take a risk and build on MUO after launch OR instantly saw that MUO was a guaranteed hit, if Marvel had been more willing to work with third parties to get MUO released... well, MUO wouldn't have been cancelled.
UPDATE - I polished up the ending a bit more.