This has to be the reason. It seems like it would be a no brainer to offer a premium service UNLESS it cannibalized their VASTLY more expensive premium services. No business is going to pay 5x for all of their employees' tickets when a reasonable option exists for only 50% more, and it might hurt frequent flier programs because people are less concerned with competing for status when you can just buy a premium seat from anyone for a reasonable cost.
If it was just about the extra space over a normal coach seat, the premium would only be 10-20% for a much larger seat.
puts tin foil hat on. I wonder if the fear is that if they improve economy with more leg and arm room and charge a little more, they will lose first class customers to the better accommodations. Essentially the intentionally make economy a bad experience so that people upgrade to first class which is multiple times more expensive.