General Lopez
Explorer
I think WotC definitely underestimated the ill will generated by "firing" Paizo from Dragon and Dungeon.
This and pulling the PDFs did not help there cause. Anyone ever hear of Starwars galaxies? They upset a descent size portion of there fan base in 2005 by trying to make there game more like Warcraft, and it pretty much destroyed the game. It is still around, but only because Sony refuses to shut it down and admit what they did in 2005 was a mistake. They could never rebuild there fan base because they always had those disgruntled fans ready to tell everyone how bad the company/game is. The disgruntled fans of the game still attack it and Sony till this day though the internet.
The internet is a powerful weapon for word off mouth. One of the last things you want as a business in this day and age is to have disgruntled a descent portion of your fan base. These fans can easily attack you through the internet, one example look at the amazon reviews for instance. The 4E Players handbook has 88 1 star reviews. If I was a brand new player and was considering buying the book I would surely think twice based on all of those negatives reviews.
I agree that Wizards believed they would have some people upset with the new edition, but they should have been looking at ways to minimize the amount of those people. I believe they just added fuel to the fire with some of the poor business decisions they made outside of the new edition.
Paizo has given some of these disgruntled fans a company to rally around, and a second option for people who did not like the direction there game took with 4E.