I think there were a lot of reasons. One was the bad paint but other factors were the line slowed waaaay down after the 1st 3 figures, the creeping up of prices plus the movies ended and people started to move on. There was a real long gap in between the Faramir pre-order and the hobbit pre-order. A long, long time which also included the delivery of Faramir with his oh so great paint job. When you had Faramir in hand and saw the pre-order price of the hobbits being around $15/$20 higher each than the price you paid for Faramir that was a big punch in the gut to a lot of people and to top it off when Gandalf was put on pre-order among all the new of Sideshows new body they went and put him on the old buck (good choice by them overall but at the time no one had a pro in hand to know that).
If Sideshow had produced figures at a quicker pace with better paint apps I think we would have probably seen the line produce more figures but it probably would have ended within a year of when Sideshow originally called it quits. Lord of the Rings is my favorite property but lets face it a lot of collectors move on to the next big thing once the newness wears off and a new line is announced. There is a reason Hot Toys bails on most lines after a few releases. Star Wars, Marvel, Batman and Aliens/Predator/Terminator seem to be like evergreens but most lines are not.