Why would it be good?
Because zombies are brilliant, blowing bits off zombies is even better, and no game has yet properly managed to evoke the spectacle of a world-wide zombie holocaust.
How would it work?
There's no obvious point in the Resident Evil timeline where an MMO could fit, so the game would have to sit outside of the main canon. It wouldn't matter though, because the sheer bloody spectacle would more than make up for a lack of continuity.
Like the GTA MMO, the game would be spread over different fictional cities, only this time around they'd be scattered across a planet in the grip of the T-virus. Humans would be holed up in fortified city areas and would travel through zombified danger zones in order to carry out co-op missions in the vein of Resi 4 and 5. Tasks could include supply runs, rescue and escort missions, assaults on surviving Umbrella labs and plain old-fashioned zombie culling, with the usual equipment and EXP bonuses available as reward. Imagine Resident Evil: Outbreak but on an immense, interconnected, persistent scale. And actually good.
Above: This is what we're after, but much bigger and better. Keep the giant bugs though.
A player's increasing EXP would pay off in terms of an extended health bar, better maneuvrability and aiming, and the ability to buy better weapons, equipment and even vehicles. To add an interesting twist and maintain the survival horror flavour, the EXP earned for each mission would be split evenly between however many team members tackled it, implementing a powerful risk/reward system for players willing to stack the odds against themselves in smaller groups.
The ultimate end-game goal would be to travel to one of a few completely safe, walled-off cities in each country, completing various high-level missions along the way. To make the run through the zombie plagued wilderness would require very high EXP levels, tight, co-operative play, a convoy of well-armoured transport and a lot of firepower. Stop-offs at various human outposts on the way would be possible, but it would still be one hell of a challenge.
Will it ever happen?
Probably not. Outbreak, Capcom's last foray into online Resi, ended in miserable, server-emptying disaster, and a game on the sort of scale we're talking about, although in a totally different league from that effort, would need a pretty chunky investment to get off the ground.
Please Capcom? It would work, we promise.
