While it may have been a bad idea, is there data to show that an alterante approach would have saved the company?
It seems to me, from what I remember people saying from shortly after the 3e release, people had largely moved on to systems that had more cohesive and throught through mechanics, rather than being extrapolations of war games, which the rules still were as late as 1999 unless you incorporated combat and tactics (and that can only help so much, and brings its own issues). 2e was supposed to be a much larger overhaul, but Zeb was ordered to make it completely backwards compatible with 1e, so he couldn't change much in the end.
Meanwhile, games like Runequest, GURPS, Pendragon, Rolemaster, Shadowrun and so forth were letting people do what they wanted to do with their character and adventures in a way that made sense and was easy to pull off without the cracks showing too much. No amount of OSR charm can change the fact that in the 90s AD&D was just not it for a lot of people. I very much remember large swaths of people online saying they came back to D&D with 3rd edition precisely because it shared so much DNA with those other games.
Splintering things may have been the nail in the coffin, but the game system looking not dissimilar in 1997 to how it did in 1977 wasn't helping anyone, with 20 years of high quality, interesting games coming out in between.