I don't believe Cao planned to keep support for MTGO or (now) D&DB going. I also don't think he is likely to kill either. I think the VTT will be an attempt to Arena-ize D&D; a flashy spectacle in which to play in, but only in select (and highly monetized) methods. Much like you can't use Arena to play four-person Commander, I don't think the VTT will support different playstyles other than "latest AP or mini-dungeon drop". I'm sure the books will still be produced (paper Magic is still sold) and I imagine D&D Beyond will get versions of them (MTGO gets the latest sets) but I think that, like Arena, the digital future will be focused on only playstyles they can monetize and sell us.Whilst I like your explanation, I don't believe this is the case.
I think Cao understood Magic a hell of a lot better than he understands D&D. Also, I don't think the goal of Arena was to fail to replace MtG/Magic Online, I suspect he considers that a failing of Arena, not a success.
Also recall that he didn't want WotC to buy Beyond, he wanted to literally destroy Beyond. He allegedly put out an email with that title (and I don't doubt it).
Paper play, with or without online tools, won't die, but they aren't going to be the focus. Arena and VTT will be.