the answer is in your post. they thought only people with good internet were worth making their product for.
and after the uproar, you still think DRM isnt a 'real' issue?
if you ignore the competition you fail
if you ignore the end consumer you fail
if your whole organisation gets tunnel vision and ignores feedback and market research, you fail.
I bet it took major shareholders to storm into xbox HQ and make the employees see the light before it got on track again. i dont think they messed up, the whole world KNOWS they messed up.