By focusing on low-end phones and not Nexus- or Galaxy-class handsets, they lost sight of the fact that smartphones are aspirational devices. People want the best phones they can get, with high performance and high-resolution screens. They don't care about libre software or the Open Web if the devices on which it runs are perceived as inferior. (Everyone I know uses either an iPhone or a reasonably performant Android phone, and I don't run in wealthy or tech circles much these days.)
Look at the runaway success of the iPhone. It wasn't cheap, but because it was clearly a quality device, both regular people and developers clamored for them. (Remember the hue and cry when Apple initially said they wouldn't provide a market for third-party apps?)
If Mozilla really wanted to spur interest in FirefoxOS among developers, they should have set up kiosks at every Fry's Electronics in the greater S.F. Bay area (on the doorsteps of Apple, Google, Facebook) to sell decent, unlocked phones directly. People would have lined up to buy them just to hack on them. I would have seriously considered buying one as an alternative to a Nexus phone, if one had been available.
1: Ars Technical eviscerates a $35 FirefoxOS phone: http://arstechnica.com/gadgets/2014/10/testing-a-3