I believe another theory is more likely: Mormon audiences are not as stupid as certain filmmakers first assumed.
I once attended a lecture by Richard Dutcher, before he left the Mormon Cinema movement he founded, and the LDS Church he had once championed. Dutcher said something which I found both distressing and illuminating. Dutcher mentioned that he was once talking to another Mormon filmmaker who spoke derogatorily about the Mormon audience. "We could $#!* on a plate and they would eat it," the other filmmaker bragged. Dutcher, rightfully, was disgusted by this declaration, as he was aiming to make high art with his Mormon subject matter, and had a much higher opinion of Church members' discernment at the time. As we saw with Dutcher's films, he was one of Mormon Cinema's best auteurs at the time, and his approach was vastly different than some of his contemporaries in Mormon Cinema.
I kept that comment in mind as I saw Mormon Cinema spiral downward into a crass series of opportunistic movies that seemed to make fun of the culture and religion rather than thoughtfully exploring it; or, on the other hand, earnestly and unabashedly celebrating Mormonism, but without the talent and production value to do such an approach justice. After the first intriguing wave of legitimately good Mormon films, we had this run of pale imitators and cynical money grabbers that ran the once smoothly running vehicle into a wall. This, to me, was the real reason Mormon audiences stopped supporting the fledgling movement of faith based films: they knew when they were being made fun of, they knew when they were being used, they knew when their intelligence was being insulted, they knew when they weren't being taken seriously.