OK. So apparently Sonic's downfall started with Sonic Heroes right? So here's what I think happened.
The downfall started as just an overreaction. "Oh no! Sonic Heroes was just...OK!!!!!???? We must do something! I know! We need more customers!" They then made Shadow the Hedgehog to gain the trust of older audiences. Everyone hated it (Ya know, in terms of majority).
A minor setback. They fell. But they fell like a mouse on tile. They rushed to get back up, but hurt themselves in the process. Sonic '06. Critics and players hated it.
And so, the downfall of Sonic.