It's not just that it was discovered to be more profitable in the abstract. Technology changes are a big factor too. Since TV achieved widespread penetration, movies have had to promise something new: either visual spectacle, something deemed unacceptable for broadcast, or something too serious/subtle/obscure. The combination of cable and HD TV have more or less eliminated the latter two categories. HD TV can adequately deliver pretty much any non-"spectacular" content. So audiences are, in general, not as likely to visit a theater for this, i.e. pay the cash required.
Think of what I'm proposing as the "Shawshank Redemption" model. Don't focus on box office sales, focus on the complete picture, and focus on compelling storytelling.
Shawshank peaked at #9 at the box office, only making back about half it's budget.
In the home video market, it has just exploded, selling over 5 million copies in the UK alone. (http://www.bva.org.uk/news-press-releases/members-press-rele...). That's kind of mindblowing...about the same number of copies as Sgt Peppers has sold in the UK, and way more than any contemporary album - the closest comparison is probably Oasis's What's the Story? (Morning Glory) at 3.3m units sold.
There's no "Shawshank Redemption model". It's an outlier, a one-off, and it would be foolish to base your business model on the idea that you could replicate it.
