I think it might have been more of a calculated risk sort of thing. Prior to the releases of Domination and Academy, both of the scenarios you guys are describing could have been plausible (at least as far as any of us lay-people know). If Mager is right that they have fractured Arena's player base and lost too much momentum as a result, then one would expect to see a decrease in Mage Wars sales over the long term.
If jhaelen is right, then one would expect an increase over the long term instead.
In both scenarios the playerbase is still split, but in one scenario the playerbase grows large enough over time that the split doesn't matter, and in the other the playerbase for each particular Mage Wars game/format is smaller from then on and never recovers, or worse dwindles away almost completely from the loss of momentum.
So which is it? Well, that probably depends on how long it would take for overall Mage Wars sales to start going down after the releases of Domination and Academy, according to Mager's theory. If after that amount of time has passed Mage Wars sales are not decreasing, then he's probably wrong, but if they are decreasing after that point then he's probably right.
Although take everything I just said with a grain of salt since I'm not a business person nor an economist.
Would also like to point out that while the success of Arena is almost certainly well-correlated with the success of Arcane Wonders (it is their flagship game after all), the success of Arena isn't necessarily the same exact thing as the success of Arcane Wonders. Fracturing the Arena playerbase into Academy, Standard Arena and Battlegrounds: Domination might not harm the company if the total amount of profit they're getting from all three Mage Wars games/formats isn't any less than what they were getting just from Arena beforehand. Just saying.