Why then kill Dragon? Why not have both?
Ah, the real question!
There are a few reasons I can think of.
At the top of the list comes the competition problem: The DI and Dragon/Dungeon magazines compete against each other. By its very nature, DI is less expensive to produce (no shipping costs or dead trees to worry about). Well, I think the 'net is less expensive than dead trees... could be wrong there. But I assume it is. So, DI already has an advantage over the magazines in that respect.
Dragon & Dungeon magazines have had a problem being profitable. I'm sure they're doing pretty well, but given Paizo is also working as an online retailer these days, it's hard to know how well they're doing. So, the DI starts up, and the magazines remain. After a while, the folks at Paizo notice something: some people subscribe to the DI instead of the magazines, and it really hurts them. A 25% drop in circulation would probably be catastrophic. 50%? Ouch. Is that figure likely? I have no idea - but I'm sure Wizards have done the sums. They do a lot more market research than they're usually given credit for.
There comes a point when the magazines will no longer be viable, due to the competition posed by the DI. At that point, Paizo is losing money, still having to pay license fees, and getting unhappier and unhappier. This isn't good. Rather than put Paizo in that position, better to eliminate the magazines and just run with the DI.
Cheers!