Microsoft bought them, and when I went up to Redmond, the Microsoft guys were talking about making Softimage mass-market software. But that never happened.
Maybe you were talking to the wrong "Microsoft guys" because I was working at SoftImage during this period and nobody at Microsoft espoused anything resembling what you claim above.
SoftImage's Digital Studio was embracing OLE2 (then COM, then DCOM) because it was going to be a non linear video/audio editor that could be deeply extended through a plugin architecture - Microsoft wanted to build on that work and get SoftImage 3D onto Win32 (DS' decision to use COM/DCOM is, of course, more complicated than this, but it would be a lengthy discussion) and Irix, but with the same extensibility features and a close integration with Digital Studio to create an 'uber' production pipeline.
Nobody saw a "mass market" opportunity for SoftImage.
So Microsoft sold Softimage to Avid. Avid made overpriced film and video editing systems, sold with semi-customer hardware and built into cool-looking furniture. Softimage had a good video editor in addition to the 3D line, and that's what Avid really wanted.
Yes, this, 100x this. Avid had been resting on its questionable laurels and DigitalStudio scared the living sh** out of them. They paid Micro$oft something along the lines of 10x what Micro$oft paid for SoftImage for the company - just when XSi was in Beta (it was called Sumatra back then.)
They did convert from Softimage to "Softimage XSI", which broke all existing plug-ins and didn't have a plug-in API that worked. That's when I dropped Softimage.
Actually, XSi had been in development for years (this was the project I worked on, as well as DigitalStudio's framework late in the game, and believe it or not a short lived attempt to run XSi on Direct3D - that was painful) at this point. It was in beta when Avid panic bought SoftImage from Micro$oft.
I'm not sure what problems you had with the plugin system, as I personally wrote plugins for it without any special difficulties.
The best thing you wrote was
They had no clue what to do with the 3D product.
This was so very true it boggles the mind. You would think that a company that was interested in making money (presumably) would at least make some effort to profit from having the industry leading special effects/vfx modeling package, but no - companies can be - and often are - remarkably stupid.
Of course, given how Avid had gotten themselves in the position of having to buy DS to begin with, the SoftImage purchase can really only be seen to be a rather large and expensive band-aid.