I doubt cooling or performance were issues any more than any of the other current ARM 7/8" devices like Nexus or iPad. From what has leaked this was a reasonable product had it been launched last year along with the Surface 2 but 9 months is a long time in technology and with the iPad A8 refresh coming soon 2013 ARM SoC technology will look pretty dated for a flagship type device.
I've been impressed by the technical work Microsoft developers have done with the Surface line, especially the latest Surface Pro - almost as much as I've been amused at the clueless marketing of the products.
The future of handheld 8" seems to be 64 bit ARM vs. x64 so if the goal of Surface is to lead the way for Windows OEMs a backward looking device like the cancelled product makes no sense at all on many levels. The question for Microsoft management is why they kept throwing money into pilot manufacturing and so on long after the shipping window was missed.