What is discussed here is the case where you lose the right to use the software if you don't continue to pay, completely independently from what that money is used for, which is why it removes one important incentive to improve the software.
And if your skillset and your data is locked up in some software, it's questionable whether you really would stop paying, and thus stop using the software that you depend on.
"...only reason they'll buy a new copy is if the new one is substantially better than the old..."
The obvious, intuitive cause & effect isn't always the case.
I bought software to encourage future development, vs wait for new release then decide to upgrade. Push vs pull.
2. That people are willing to effectively pay in advance for a future release without any guarantees what they will get for it is irrelevant to the question of whether you have the lever to shut off that cash flow if they continue to not deliver any updates of value to you, while still using the existing version.
In other words: You are simply missing the point.
Buying a license today is investing in future development. I wouldn't pay to use software that's not actively being maintained. Nor would I expect my customers to either.