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In the early days of the industry, instead of fighting piracy, companies let the users share their games freely, and put some nag screen or something like that on the game.
Then they would sell DLC and expansions (yes, DLC is 20 years old actually :P), hintbooks, cheat codes, swags, etc...
Why this model died?
Note: I am talking about classic shareware, not the crippleware or demo crap.
The concept hasn't really died, it's just changed a bit and been given a new name. In fact, if you have an iPhone you can see it in action right now! Many 'free' or 'lite' games offer a sampling of gameplay and allow you to purchase DLC to promote it to the full title.
On the PC use has declined, but I believe part of the reason for this is the lack of a platform to easily distribute semi-secure DLC (the other of course is piracy). As digital distribution platforms grow, I believe we'll see a resurgence in shareware-style software model, perhaps even starting with Valve's recent Alien Swarm, should they choose to provide DLC campaigns.
It's still around. We just no longer call it Shareware. We call it the "freemium" model: free to play but with premium content available for cash. The only difference between now and the old days is that we have better ways of accepting payment today: accepting credit cards over the internet (no more "mail a check to this address and we'll send you the full disks in the mail"), for example.
Because people played the Shareware version of the game and then when it was done. They stopped playing and did not buy it.
So the turnover rate was very low.
The old shareware model you speak of "died" when the internet came to be popular, since a large part of the old shareware model was the shareware distributes and the copy/delivery fee you had to pay to get your free program
One important thing to note is that old-school shareware generally had copy protection that boiled down to 'if(strcmp(reg_code, "12345ABC")!=0) { nag_screen(); }'. Given that modern game pirates can effortlessly destroy even some pretty complex network-based DRM systems, this doesn't stand much of a chance.
Ease of piracy did a lot to kill the PC shareware model. It was one thing when downloading the first episode of Wolf3D off a BBS was a big deal. Now you can find a full retail game before it even hits store shelves. It's just too easy to distribute large files.
Places like Steam/iTunes/XBLA/PSN are showing a resurgence in the shareware/demo model as they can keep the full content behind a pay wall from all but the most dedicated pirates.
Another possible factor to consider is the rise of free online games, especially Flash games like those on sites like NewGrounds and PopCap. Why download a free game when you can instantly play it online, without the hassle of installing anything (beyond maybe a browser plugin)?
