Because they could make money the other way? Obviously we don't know if PDF's were profitable but I'm guessing they weren't otherwise even with Piracy out there the company is still in a net benefit position and therefore would continue the practice. Paizo experiences as much pirating as WotC did but they continue to use that method of distribution. It may work for them because they have lower overhead? Lower profit targets? Who knows? But really, the bottom line is that the profits of producing and maintaining the PDF's must've been lower than other alternatives (i.e. Wizards could invest their money into another line that generated higher ROI).
Well, it's easy to say "to make money" but harder when you actually are the one looking at the numbers and coming up with a plan to make that money.
I think you have to look at everything involved really to get any sort of understanding, not just whether or not pdfs would sell.. (Obviously they would.)
I think also a lot of it was also not so much fighting piracy, but also competing with it.
Why spend the resources, to try to sell a product that someone can essentially get for free if they're willing to pirate?
At that point the only think you have going for you is a customer's sense of moral obligation (and as we can see from just this thread alone there's a wide spectrum regarding that.)
It "seems" on the outset like their idea is that the DDI offers the same type of functionality that a PDF would offer, but in a way less easily pirated and adds functionality as incentive over what the pirates offer.
Whether they're actually accomplishing that... Eh, I'm sure everyone would agree they need to add a lot more to the system, but the central idea is there.
So now instead of trying to convince someone it's morally right to buy their pdf instead of pirating a free copy of the exact same thing they can say:
"Hey buy a subscription because if you do, you don't have to bother doing the work to download everything, you get access to the game in digital form, and tools to make that experience better!"