But Playstation as a whole absolutely does. They could have made it work if they really believed in it. Naughty Dog themselves wouldn't even necessarily need to be the main support studio for the 'live service' part of things after the base affair and structure was built and planned, or ND could have been expanded to do so.
I've seen lots of people online eat up Naughty Dog's PR excuse for the cancellation as if it'd just be impossible to do both single player games and a live service multiplayer title, but that's hardly unprecedented. Respawn have made and supported Apex Legends all while doing two AAA single player titles(and more in the works). It's definitely doable, plus having split teams is basically the way forward for most big studios nowadays.
I think the most likely answer is that the project just wasn't shaping up well. We'd already heard some rumors to that effect, so it seems hard to believe everything was actually fine, and it was simply about not having resources, especially for an elite studio like Naughty Dog who can usually demand what they need from Playstation in that department.
EDIT: I should note that I'm not unhappy with this decision, nonetheless. I've been rooting against Sony's live service push as soon as they announced it and certainly would rather see Naughty Dog being fully committed to making top notch 'cinematic' AAA games as they have become known for. They make good money for Playstation on their own, but also importantly they significantly prop up the reputation of Playstation as a brand, which has a ton of value.