So, I guess the question begs...why do people find it necessary to water something down? I mean, if the goal is self defense, which I'd assume that anyone who trains, that should be the main goal, you would want to learn something effective, not something that has little chance of working.
This thread has been a very interesting read so far and I thought it was time I contributed something.
Watering down the arts? It a strange idea isn't it? I honestly don't think anybody sets out to 'water down' their art. The effect comes from interpretation and poor teaching. I have had students that no matter how many times you showed them a technique or movement they simply could not get it right. They were just seeing it completely differently to me. If you add to this slip-shod or lazy teaching then you are going to get something quite different to what you started with.
Even the McDojo boys are not going to their syllabus and saying, "we'll take that out and forget that, and we can do without this." Rather, I think what is happening is that they are adding so much peripheral rubbish that there is no room left for the actual content of the art. so its not so much watered down as pushed aside.
Then they run into other problems. Give the people what they want to get more students but, as Rich pointed out, big classes are prone to suffer from misinterpretation and error simply because the teachers cannot give each student enough individual time.
You can then move into the motivation for learning a martial art in the first place, self defence, fitness, sporting achievement, to be part of a group.
If it is for self defence there are two paths. The first is to seek short, quick highly effective techniques (modern?). The second is to work through a longer syllabus and find those same techniques (traditional). Does this lead to a watering down effect? It might, but it more likely that it will lead to a different school.
What about fitness? Such a pursuit does not need a lesser program to fulfill its needs. The focus is different but the content can be the same.
Sporting achievement can cause some seeming reduction of an art. For example, Olympic TKD does not encourage hand techniques at all, so effeciency would dictate that you not practice them. Most TKD, schools do teach them, even those preparing students for potential Olympic competition. So the sport aspect of an art does not have to lessen the art, unless the participants want it to.
Just wanting to be part of a group can have significant effects on an arts content. This sought of motivation does not place any value on what is being taught.
However, there is an important fact that affects all of what I have said above. Its not the quality of teaching or the material, it is the fascility to progress through the art. If the testing and progression system is working properly then some people will get stuck at low ranks because they have the wrong approach or motivation. This is where the McDojos are really causing a problem. It is too easy to progress to a level where you can go off and teach. If its too easy then the dues haven't been paid and the knowledge hasn't been properly processed.
I honestly think that dodgy testing and progression systems are the root cause of the apparent watering down of martial arts. It allows people who should never teach to be in the position to do just that.
I've gone on a bit here but my only excuse is that I find this a very compelling subject.