I agree splat sells initially. however I question whether it is sustainable over the long haul. This is just speculation, but I think the reason WOTC keeps releasing new editions or half editions in such a short span is because the splats paint them into a corner eventually. Whereas if they took the approach Paizo seems to be taking I think they would have less of a big burst initially but more steady sales across the span of a single edition. Just speculation, and admittedly it is informed by my preference for non splat material.
A typical splatbook almost certainly outsells a typical adventure, both initially and over the lifespan of the book. You are right that there is a limit to how much splat can reasonably be produced for a given edition; eventually the product line must be rebooted with a new edition, so all the old splats can be re-published. However, if the reboots are successful, the splat business model is far more profitable.
That is, of course, an important "if" right there. Wizards rebooted 2E with spectacular success as 3E, then rebooted 3E with 3.5. The latter was widely criticized as a money grab (and if Monte Cook is to be believed, that's exactly what it was), but most gamers did eventually follow along, and WotC was able to re-create the old splatbooks as shiny new hardcovers.
It wasn't unreasonable of them to think they could keep it up, and they might well have done if 4E had not been such a radical departure--or if they had done a better job with the GSL. As I recall, most of the 3PPs were standing ready to jump on board with 4E, including Paizo. But when WotC was unforgivably late with the GSL, and then the first version included a bunch of clauses that no sane publisher would agree to, the 3PPs couldn't hang around waiting forever. Paizo was already developing Pathfinder as a way to get a little money from the 3E holdouts, but it was the GSL fiasco that drove them to make it their flagship product. And then, when there were a lot more 3E holdouts than anyone anticipated, Paizo was right there with the alternative.
And I think this was because the loudest gamers were the ones saying they wanted more crunch, less fluff and a perfectly balanced game. I don't think they reflected the feelings of the majority of gamers though.
I'm pretty sure they did. WotC knows how to do basic market research--they aren't just reading posts on the Intarwebz.
I think, however, that WotC misinterpreted the feedback they were getting. When I buy a gaming book, I don't want pages and pages of flavor divorced from any mechanics, unless the writers producing that flavor are
really damn good, and writers of that caliber are beyond rare in the gaming industry. If you have it in your head that flavor goes in one box and mechanics in another, it's easy to read "Stop giving me pages of disconnected flavor" as "We need less flavor, more crunch," when in fact it means "We need our flavor to be more closely tied to our crunch."