Almost the same exact thing happened with Wizkids when they came out with mageknight 2.0 and made major changes to the mechwarrior line (with the Age of Destruction makeover). You would think WotC would have paid attention considering how well Wizkids is doing now (i.e., out of business).
To be fair, MageKnight had its share of problems
before 2.0. It's a salutary lesson in how not to run a CMG. Yes, Balance is important... and if the Limited Edition figures you get for winning tournaments are better than the regular figures... well, then you get a vicious cycle.
The property that was much better handled was HeroClix, and that continues today with another company.
My own feeling is that D&D Miniatures Skirmish was in decline before DDM2. The game worked very well within a certain range of point values, but when smaller or bigger point-value figures needed to be made (due ot the correspondence with D&D 3E), then problems emerged. However. DDM2 didn't help.
However, any problems with the Skirmish side were - to my mind - a minor part of the problem with DDM; the Skirmish game was a nice addition to the minis, but the chief purpose was for the D&D RPG. So, when the D&D RPGers slowed down their purchases, the entire line suffered.
I know that towards the end of my major days of buying DDM, I was approaching saturation level, and I was getting very irritated at some of the rarity decisions that were being made; I was extremely annoyed when new (important) minis appeared in the huge packs at the uncommon levels. The cost get a "play set" was just too much. Then there were the problems with scale...
However, all of those problems were minor when compared to one big fact: the cost of DDM packs had gone up significantly. Harbinger was extremely reasonable; unsustainably so, I expect. However, it was what we judged new packs by.
Cheers!