I get everyone being disappointed. The event sounds fantastic and I understand getting about it. I have had the experience of not getting in to a D23 event I wanted to, but I also have been able to attend many. Many of the D23 events sell out fast and many do not. I had no problem getting in to the Sip & Stroll event which was a fun time, despite the fact that I don't drink "on property".
This event obviously had a low capacity. Even at Sip and Stroll the buzz was that Magic and Merriment was going to be tough to get in to. But the capacity of the venues are such that increasing the capacity of this event would cause many of the experiences that define the event to be cut out. I'd hate for no one to be able to visit the Castle Suite due to the fact that many are disappointed they couldn't get in. With the Christmas Parade taping the week before and the crowds arriving after, even holding the event for multiple weekends would not be able to be supported by the Park Events team that work for WDW.
The D23 team knows that many of their events are hard to get in to. Thats why they are doing many larger events such as the scavenger hunt and Destination D (not to mention the Expo). There are D23 events you can get in to without having to be at the computer at the right second, and there are some that will continue to be a challenge to get in to. But if the options are to have Magic and Merriment for a lucky 200 and having it for no one, I think D23 has made the right choice even if some folks are disappointed.
Also, I could never tell anyone how to spend their money. If you bought your membership just to get in to Magic and Merriment, I can understand not renewing. However, don't forget that as a member you also get the magazine, member gift, special goodies, and the ability to attend other special events that have a higher capacity.
I was at Expo last year and also the Destination D event and Scavenger hunt this year. I loved those events and but want to try one of the smaller venues. I agree with your option of keeping the event if only 200 can attend. I just think if the event is for only 200 then limit the tickets to 1 or 2 per member not 4. Or maybe charge more for non members. With 4 tickets per person that possibly lets only 50 members attend with 150 non member guests. Yes, that may get more people to join D23 but it is also causing some to not rejoin. I did not join D23 for these small events-just the magazine and Expo make it worth it for me. I would like to get to this particular Christmas event and will try again. Sip and Stroll was not of interest to me as I go to the Food and Wine event every year at Epcot.