While I'm not sure it was the Freeze Frame line that killed the modern line's momentum (that was probably due more to the glut of Ep1),
Well, my reason for the FF line killing the modern line's momentum (which I mentioned in a prior post in another thread which Muftak has quoted above) was this:
In 1998, the appeal of the Special Edition theatrical rerelease in 1997 had cooled down considerably. 1998 was what Hasbro/Kenner calls a "non-movie year." The problem was that they had not figured out how to do case assortments at that point in time and focus on the people who were actually buying the products in a non-movie year: the collector. They did this very well with the POTJ line in the years between TPM and AOTC, but the FF line stunk of their oft-quoted "kids buy more SW figures than collectors do" philosophy.
So, first wave of figures hits, that being the first Collection 1 case. Out of that case were seven new figures (two each of the Endor Rebel Soldier, Lando General, Ewok Gown Leia, and one Bespin Luke). The remaining 9 figures (this was back when there were 16 figure cases, as opposed to the current norm of 12) were all recards of older figures. The first Collection 2 case was a similar situation with two each of Biggs, Lak Sivrak, and the Ewoks, along with nine more repacks of older figures. Collection 3 was a little luckier, with eight new figures (2 each of RH Vader, Ishi Tib, Zuckuss, and Piett), but there were also eight repacks. I thought this would be the worst of it. I was very mistaken.
As I mentioned before in that prior post, around this time Hasbro/Kenner decided to do a case assortment for Collection 3 that was solely made up of repacks. This is where some of the harder to find FF repack figures from Collection 3 came from (TIE Pilot, Fett, and in rare cases, Weequay). The problem was that these (in most cases) did not move because the shelves were still packed with tons of these figures in their 1997 holograph card iterations. So in addition to old figures on new cards, there was still a glut of old figures on old cards. It did not get better.
The Blast Shield Luke wave comes out; again, eight new figures, eight repacks. Collection 2 was even more ridiculous: 2 Ugnaughts and 14 repacks. Collection 3's second new case assortment was two each of the DST and Ree Yees with 12 repacks, and I don't think I need to remind anyone of what a disaster that was.
Over the rest of the year, Hasbro released another Collection 1 assortment (Lobot, Chewie in Chains, Mothma and Prune Face), another Collection 2 assortment (with 8D8 as the only new figure), and no more Collection 3 figures (except for the Hoth Leia wave I'll address in a minute). The entire year, Hasbro had been printing ads with photos and checklists focused on their upcoming Expanded Universe line, so people were actually really excited (at least in the collector community) about these figures being released.
The problem was that due to the horrendous case packouts in Collection 2, where the EU figures would be released, stores were stocked to the gills with Rancor Keepers, Admiral Ackbars, and Nien Nunbs and because of this, everyone's ordering systems showed no need for any Collection 2 orders to be replenished. Thus, many areas only saw the first three EU figures if they saw any at all (I was actually one who only saw the second wave minus Katarn and had to get the others elsewhere) and by the time the last wave, the one that arguably everyone was the most excited about, came out, they were impossible to find at all. All because of that glut of older figures.
The stores took a big loss on those figures they couldn't sell, even with the 2 dollar off coupons. The thing was that stores were able to sell Stormtroopers and other Imperial army builders fairly quickly, but who in their right mind needs those 50 Rancor Keepers and Ackbars hanging around with an inch of dust on them? A local WM had a larger display area for those old dust collectors than they had for either TPM or AOTC. It was one complete aisle, with almost 80 pegs, filled with all this old crap that nobody wanted. They knew that Episode I was coming up in the spring and they wanted to allocate shelf space to it and not be stuck with all this old crap since (in their minds at the time) TPM would have a film to coincide with the toy release, and that would help sell things.
That's why when Hasbro/Kenner decided to release that last Collection 3 wave of Hoth Leia/AT-AT Driver/Pote Snitkin/and the DS Droid in November of 1998, the retailers basically told them "no thank you." (for those of you who weren't around back then, it was the equivalent of Mattel's He-Man case assortments in a lot of ways, but not specifically; a case of the manufacturer sending out loads of the same old crap that won't sell and expecting the retailer to buy every last one of them anyway because "it's Star Wars"). Hasbro/Kenner had to then sell those figures as Fan Club exclusives (and I think anyone who was around back then remembers how much they were charging for those figures-$24.00 for two of them plus shipping on top of it, so $48.00 plus shipping for the set of four; thankfully I eventually got them for just under retail from the FC when they were still swamped in them six months later and had to mark them down) because retail pretty much told Hasbro/Kenner "NO MORE."
So there's my reasons why the Freeze Frame figures destroyed any momentum the POTF2 line had at the end of 1998. Yes, Episode I was, for all intents and purposes, a disaster at retail, but that disaster was shared by retail and Hasbro; the FF fiasco was all Hasbro's fault and I had thought they'd learned their lesson by now.
I could ramble on and on but I'm sure that nobody wants to hear it after reading my conspiratorial nonsense.