If the speculation is true, then the only thing that killed that studio is Fumito Ueda's horrible mismanagement. ICO and Shadow of the Colossus are great games, but it's likely he let his ego get the better of him and he decided to tackle something far beyond what his team was capable of. All that did was waste everyone's time and Sony's money. Even smalltime studios have made HD games, so that isn't an excuse at all.
When you have the resources to build a house, you don't set off to make the Taj Mahal. No one is going to care what your grand vision was if all you could produce are the front steps of an unfinished monument. The only thing that matters in this world are actual results. In over six years of time that the PS3 has existed, he and his studio has delivered nothing. Meanwhile, Naughty Dog released three Uncharted games and is working on a new IP, all running on a remarkable custom 3D engine for one of the most complicated pieces of hardware to program for on the planet and setting a standard that numerous studios across the world are now trying to duplicate.