Bad idea or not, there were plenty of people at both Microsoft and Ensemble Studios who thought making a Halo MMO was a good idea. So many, in fact, that prior to the game's cancellation, it had actually been given the green light to enter full-blown production, and it was only "some reorganization at Microsoft" that killed the project off.

Ensemble has been wanting to make an MMO for a long time. That was in production for a long time. The Halo IP was a great IP to launch an MMO with. Microsoft... hasn't had the best track record with those.

And we worked on it for a long time—we had staffed up an almost-40 person team. And then there was some reorganization at Microsoft, and the new bosses thought it wasn't the best idea anymore. It had actually been green-lit, and then it got cancelled after that.

So it's the "new bosses' fault"? Sounds like the smartest move Don Mattrick's made to date.

Age of Empires Dev Ensemble Speaks Out on Studio Closure, Microsoft, and the Cancelled Halo MMO [Shacknews]

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