Cancellation's just as good as failure as far as I'm concerned. The setting may have still been making a profit, but if that profit wasn't enough for Sword and Sorcery Studios to continue its production, then it still failed at something.
With that said, here's my own thoughts on why it failed. In no particular order.
1) Setting diffusion. The implied feel of the first few books began being drifted from further and further with every book. The rather Hellenic, relatively rare magic, gritty world that's only just been allowed the opportunity to achieve civilization at the cost of great devastation was stepped away from as early as the Ghelspad hardcover. A step more towards generic fantasy is not a good one, in my opinion. Successful campaign settings need something to set them apart from the Forgotten Realms, Greyhawk and Dragonlance, not make them look more like it.
Towards the end, any sense of focus was washed away and the setting was too generic in places to set it apart from Wizards of the Coast campaign settings.
2) Inconsistent setting and quality. Too many authors, for one, without a tight enough rein on them by the developers and editors. This plays in part to the setting diffusion - without focus, things will get willy nilly. It's also a simple matter that too many different people will interpret the setting in their own way that, while valid, will look different from what some other writer offers up.
The quality comment, of course, ties into that. The more writers, the more likely you'll have some bad ones. However, some of the standard setting writers themselves were inconsistent. Rhiannon Louve was a major contributor to the setting; despite that, though, one of the last books she wrote for the setting ignored one of the Scarred Lands first established tenets (that of, if you respect one of the gods, you bring the whole pantheon with them or suffer repurcussions for it). I'm also amazed at times when I read two different pieces of her work and just how good one might be, yet how utterly horrid the next might. Too many authors, too little consistency of quality and too loose setting development.
3) Too many books. As others have pointed out, there were just too many to keep up with them. By the time the last book sees print, the setting will be just a little shy of 40 books, excluding novels. Two books every three months or so, in light of the fact that most people will not be exclusive Scarred Lands buyers, makes it difficult to keep up with them all. That many built upon the book before them makes this worse. Few are going to buy every book for an extensively published campaign setting and if missing a few of those books leaves someone in the dark for later ones, it's more likely they'll leave the setting rather than trying to keep up.
4) Too much of a start up cost. Beyond the core books, you really only need one book to get into the Forgotten Realms. Or Eberron. Or Midnight. All of these come with, more or less, the geography, the gods, a few new spells and monsters specific to the setting, a small starting adventure and a number of new organizations and prestige classes. All in one book that explains the setting.
The Scarred Lands, however, lacked this. Three to four books, minimum, to really have the setting rounded out, explained and have a few setting specific beasties, spells and so on to complete it. For everyone who eventually just lost interest in the Scarred Lands, I'd wager there were any number more who never looked into the setting simply because it lacked a single, solid campaign book.
5) Metaplot and setting changes too early on. I don't think these things attract new people. They might keep a few interested, perhaps, but I think, ultimately, they drive some people away.
6) 3.5. The writing for Scarred Lands mechanics wasn't solid to begin with, in my opinion. The switch to 3.5 came just around the time Sword and Sorcery Studios was going to publish the Creature Collection Revised and their class books. The Expanded Psionics Handbook was published right around the same time the Scarred Lands was about ready to sell a psionics book using original 3rd edition mechanics. The psionics book was outright out of date, whereas the class books and Creature Collection Revised made a rather rough transition over to the new, unfamiliar mechanics. I think this may have ultimately proved to be the final blow to a setting that was wobbling a bit.
Anyway, there are my thoughts on the matter. For now.
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