Over the last few months I have spent a little bit of time play testing D&DN, playing Pathfinder and even a few games of 2nd ed. It is hard to define where D&D went wrong but I think I have found the main catalyst for what happened. Much like the 20th century World War II may be the popular event but the cataclysm that shaped the 20th century was really WWI as it created problems that lead to WW2, the cold war and the Wall Street Crash of 1929.
It would be hard to pick the exact moment but I think I have narrowed it down to the main problem of D&D and what actually did go wrong. Almost everything that is wrong with D&D right now ultimately leads back to this event.
That event was......
The release of 3.0 in 2000. Now do not get me wrong as 3rd edition is my favorite edition overall even though I can admit I like 2nd edition as well. 3.0 was the edition that started the ball rolling however which ultimately lead to the 3.5/4th ed edition war and the rise of Pathfinder. Anyway I found an interesting quote in the 2nd ed DMG (1995 page 45).
"Reducing a character to a list of combat modifiers and dice rolls is not role playing"
That is a insult that has been directed at 4th ed but one could make the argument for 3rd ed as well. Just to be clear I do not think 2nd ed is the be all and end all of D&D either. In 2000 2nd ed was getting dated and I do not miss level limits, THACO, and racial restrictions on classes at all. 3rd ed was also popular and still is via Pathfinder but consider.
1. The splat book spam started with 3.0. 2nd ed had a few as well but they often focused on fluff and they were spread over 11 years. I would argue that 3.5 and 4th ed suffered from the weight of their own bloat.
2. There was a large shift towards player entitlement. 3rd ed was very easy to create magic items for example. Pathfinder and 4th ed both continued this trend and if you thought magic items were overpowered in 3rd ed and boring in 4th ed this is a consequence of that decision. A quick trip to the 3rd and 4th ed char op boards quickly reveals the assumptions about acquiring magical items and if the DM doesn't give them to you they are not that hard to acquire. There were power builds in 2nd ed as well (dart grand master+dual wield+ gauntlets of ogre power/girdle of giant strength). 4th ed put the magic items in the PHB, not the DMG.
3. Partly related to point 2 but 3rd and 4th both suffered from a a lack of quality adventures and splat books were heavily focused on player mechanical benefits- feats, prestige classes, powers etc. They let Paizo which at the time stat printing Dungeon Magazine. This would later come back to bite WoTC in the butt but they were basically to lazy or unmotivated to make good adventures based on profit. PLayer crunch sells better, starve the DM.
4. Boxing up the game. 2nd ed made no real assumptions as to what type of game you would play. The DMG was full of fluff and tidbits of history in regards to what equipment was available based on things like tech level of the campaign world. It was not assumed that the world was high or low magic and 2nd ed had lots of optional rules and campaign settings with variants in it. 3rd ed assumed a somewhat high magic world with things like magic mart while 4th ed went further and added creatures with supernatural abilities in the core rule (Eladrin, Dragonborn). The fragmentation of the player base probably has something to do with this approach IMHO.
5. Losing the "feel" of D&D. 2nd ed books have aged quite well and one can still mine them for ideas. They were fluff heavy and even educational as they often used real life examples from history in the core books. The 2nd ed fighters handbook is still quite enjoyable to read 24 years after it was printed. Being honest how much fun is it to read the Complete Warrior or Martial Power just for fun? The style changed due to a focus on mechanics.
6. Mechanics (again). The major problem of the transition from 2nd ed to 3rd ed was CoDzilla. Put simply they buffed the heck out of spell casters, removed restrictions they had on them, nerfed the fighter (used to have great saves, could move and full attack) and then to top it all off let them advance at the same rate as other classes. 3.0 was fundamentally broken right out the door, 3.5 tried to fix this. Pathfinder still has issues around this and 4th ed attempted to fix it but arguably in the wrong way and alienated the player base.
In conclusion the change over from 2nd to 3rd ed I think was the main catalyst for most of the problems in modern D&D. This is not to say that 2nd ed sits on a pedestal as the definitive version of D&D just that they could have done things better. Scuttlebutt on the forums once upon a time indicated that 3rd ed was not play tested at higher levels and 3.0 haste slipped through anyway. We have had 3 major versions of D&D since 2000, 4 if you count Pathfinder, 5 if you count D&DN. In the same time frame as 1st eds existence (1977-89, although it remained in print during the transition to 2nd ed) we have had 4 versions of D&D. WoTC broke D&D back in 2000 and have been trying to fix it ever since.