The problem with this argument is whether adding new things to the setting (in terms of the PHB options) is "watering it down".I would counter, though, that if you go that route, you will lose some of the audience who aren't interested in a thematically "watered down" version of their setting.
The trick is to walk that narrow pathway that displeases the fewest of each chunk of audience. Now you're probably (and, IMO, unfortunately) correct that if you must piss off one or the other, you'll probably lose fewer of the die-hard fans if you make the settings more generic than you will the casual fans if you make them too restrictive. But I still feel that there's a middle ground that includes some level of omission/restriction, even if not as much as some die-hards would prefer.
Settings grow and evolve, and sometimes they have to adjust to new material. Mystara in 2e had to find homes for multi-classing, rangers, bards, and half-elves. The 3e FRCS brought over all the planetouched races (previously from PS) to Faerun, as well as ret-conned the story. Arthaus Ravenloft had to contend with sorcerers, barbarians, monks, and half-orcs (the latter re-fluffed as Caliban). 3e Dragonlance did the same with Krynn as far as finding homes for sorcerers, monks, and such. 4e Eberron had to accommodate eladrin and dragonborn, 3e Dark Sun the psionic Handbook races, 4e Dark Sun a huge swath of PHB options like warlocks, bards, shaman, and sorcerers. Each of those settings were not ruined. They grew.
A few compromises can be reached (half-orcs were a poor fit for Ravenloft, so they replaced them with a mechanically similar yet thematically different race). But I think you'll see most, if not all, of the classes in PHB as well as a majority of the races have homes on Krynn, Athas, Cerelia, Mystara, Oerth, and Eberron. It makes sense to sell settings that can accommodate expansion. A DM who runs traditional Athas has little need for Volo's Guide to Monsters, so that is a sale lost. I can't see a scenario where having settings using half-or-less of the printed material out there makes them more money.