I wonder how the reaction to Soul Calibur 5 was taken at Namco. They did something similar, trying to pare down the roster and introduce some new characters -- and it went over like a lead fart with their core playerbase. I don't remember any of the new replacements being liked more than the original characters, and if you were a fan of one of the characters that was removed, then you were basically told to get fucked.
On the other side, even if you reduced Tekken to 40 characters, it's probably too many. Having to learn that many match-ups (with the inherent dumb gimmick each character in Tekken has) is going to scare people off. Cutting someone like Tiger or P.Jack is not going to do much of anything to reduce the complexity of the game (since the number of unique styles in the game is still the same). Honestly, I think the mechanics need more work than anything. There's no need for something like 10-strings to exist now other than to piss of players who don't know them. What does having stuff like big, slow lows do other than serve as a strict reflexes check? Why does the default movement have to be so goddamn bad?
I think the decline in the series, from Namco's perception, is relatively recent -- remember, the series didn't really take off in arcades in Japan and Korea until T5

R (where it finally passed VF5 in Japan in terms of coindrop rates and total playerbase). This kept up with 6 and 6BR -- the series has only really dropped off with TTT2.
I'll be honest: with Tekken, Namco probably really is better off just riding the series into the sunset -- or at least waiting several years before doing a new game. They are losing players due to attrition, but I doubt anything they do would bring in enough new players to make up for it (never mind accelerating the attrition of the playerbase if you screw up and piss your loyal players off). If they want a reboot, they should make a
completely new IP and start fresh with that. It's a risk (oh noes, not the risk) but it's exactly what ArcSys did with BlazBlue and it worked out wonderfully for them. In the best case, you now have two completely distinct fanbases. In the worst case... you have another bomba on your hands (which Japanese developers seems pretty good at producing recently). It really comes down to the budget, which is hard for a FG to deal with as they tend to be some of the "leaner" games to develop, so cutting the budget is going to hurt.