I already expected this to happen. So where to start?
Last year, Silicon Knights and Nintendo started to work together once again on a new title. Based on the fact that they already had Wii U dev kits and also based on Dyack's comments, it was Eternal Darkness 2.
With Nintendo being a major owner of Silicon Knights, they were pretty much the studio's last saviour. After the commercial and critical failure of Too Human, just as well as long delays of both Too Human and The Ritualist (Sega, later THQ), Silicon Knights was pretty much avoided by 3rd parties. While they still got a contract for X-Men Destiny, the title received miserable reviews. All of this led to a series of layoffs, going from 150 employees in 2007 to only 40 in 2012.
Of course, the Epic trial was not much of a help either. While SK already had a buckload of debt (e.g., a loan which needs to be paid back next year to the government (?)), 3rd party publishers feared that if SK lost the trial, SK would close shops and the game would end up unfinished.
So as already mentioned, the studio was solely dependent on Nintendo's goodwill since late November 2011. But then the trial against Epic took place last week, and SK lost it. SK was ordered to pay 4.5 mio USD to Epic, and additionally they may need to pay for Epic's legal fees (any idea about that amount? Should it be above one million?). The company's debt rose to a new level.
That's apparently when Nintendo noticed that things may not look as shiny anymore. I do not know what the budget for a mid-tier HD game like Eternal Darkness 2 would have been, perhaps 40, perhaps 50 millions USD? When Nintendo saw that they would need to pay an additional 10 million USD to have the company survive that develops the game, they didn't seem to like it, especially as they wouldn't get anything in return. This has happened in the past too, do you remember Factor 5?
So it looks like there have been internal discussions between Nintendo and Silicon Knights. NCL reviewed its decision and it appears as if Eternal Darkness 2 is cancelled for now. Hence, many of the 40-man team were laid off, leaving the studio in limbo now.
Obviously, Dyack anticipated what was to come. He did not comment on the outcome of the trial except for saying that they will appeal - that appears to be a last attempt to save the studio now; they've got nothing to lose anymore.
Good luck to all employees who lost their job.
