How can they make "better, more expensive stuff" if they are losing money? How does one measure "better", anyway? Is it a quantifiable measurement, as the '0 to 5 stars' system tries to indicate, or is it qualifiable, that is, does it stand out from the "bad" on the merit of certain inherent qualities?
At the fundamental level, all media revolves around cultural taste - if people start to undergo a change in taste, the media has to adapt to continue to make money for its creators.
I define better as pretty much the opposite of the current trends in anime - the outsourcing, the fanservice pump in DVDs, the streamlined/generic plots and unoriginal twists, the "mainstream" artstyle and the overall cheapening production.
As Carter likes to say, the transition to TV was the first deathblow to the ever-cheapening quality of animation, but if TV was the first, DVD was the second - most anime companies nowadays no longer rely on television revenue because cultural taste in Japan has modulated away from anime as an acceptable for of entertainment for adults. ooshi commented on this nearly two years ago, and it seems things have gotten worse, if one keeps track of the number of shows getting animes in recent times.
I don't think it's quantifiable without going into the mechanics of the anime - it's very objective to say whether or not something has better animation, for example. For even other aspects it's impossible - we can't objectively claim if a certain colour or artstyle is superior or not to another, or a certain voice actor. We can comment on the actor's intonation and voice range, but not who is the better thespian.
In short, whether or not you the individual actually pay good money for a series has no bearing on the improvement of animation. Only the profit estimates based on the performance of other, similar series will determine that. Why do you think originality is so rare?
True, but my issue with that is the "downward spiral". Let's take the example of Shakugan no Shana Second, which was my big series last season and tuned out to be a total turd. In the first season of anime, the show was well regarded and sold well - this lead to the creation of a movie which sold as well, and various merchandise. A great way to start off the show.
Why did Shana II suck? Fanservice. Not so much as ZnT II, but the show show was swamped by pandering at the cost of plot and coherence. We already know this series is marketable, and successful - why change the formula deliberately? Herein lies the paradox.
Event #1 - anime otaku buy the Shana DVDs, SnS II > SnS in sales. JC Staff decides to make more but adds even more fanservice since it appears the fanservice is what generated more sales, as the staff and budget were identical to the first series.
Event #2 - anime otaku don't buy the Shana DVDs, SnS > SnS II. JC Staff doesn't animate anymore of the series, it dies a quiet death having been disgraced by some idiot's horrible moe fetish.
Herein lies my #1 biggest beef with the Japanese industry - the whole market system of DVDs basically gears the show to pander to the lowest common denominator of a consumer, a person who thinks with his cock and not with his brain. This makes anime little better than porn, minus the explicit content.