Observation is a game that appeals to a VERY niche audience. I am sure the devs understood this and took the payday because they knew they would never get anywhere close to that amount in sales. And I'm sure Epic has made only a fraction of the money they fronted back. This smells like the EGS trying to recoup some of that loss.
And that's the problem. Extra niche games need to be presented to as many people as possible. And not on a store with a limited amount of people and a controversy around it.
The Fortnite crowd wasn't interested. How surprising.
The games media is right, the game wasn't a financial disaster thanks to epics money. But it also had no chance to sell to as many costumers as possible, gather a following and make fans.
It's dead, no sequel, nothing similar and no encouragement to make a new very niche product again.
Short term win and distribution, long term negative effect and a bitter aftertaste.