According to people I've spoken with, there were a couple of primary reasons that played into the decision:
1) More rooms places greater stress on resort amenities. We're talking front desk, bell services, parking, theme park transportation (including shared monorail line), pool, dining, housekeeping...right on down the line. Keeping the same resort footprint--with only the bungalows as an addition--means those services can largely remain as-is. More rooms would have required additions, which comes at a higher cost. And there were also logistical concerns regarding how much can they really expand the pool, parking, transport, etc. without harming the entire area.
Consider the complaints about VGF being added to the SSL beach...now magnify those complaints for 2
DVC Poly towers.
2) The other big factor was the reality that many longtime Poly fans will buy DVC points. That moves many die-hards from cash bookings to DVC points. If the Poly were to have maintained the same number of cash guest rooms, Disney would have had to work harder to fill those rooms. "Working harder" is code for lower rates / discounting.
Meanwhile demand was bound to be lessened by the loss of beach space that would have accompanied not only the bungalows but two multi-story villa towers.
By taking the cash hotel down to 60% of its original size, Disney can continue to demand high prices for those rooms.
All of that said, DVC can always revisit the towers at a later date. That option will never be truly off the table.