I don't understand why, it's a unique system for the game, and more fresh than the usual KO methods. Changing to to KO by damage would introduce a new can of worms where they'd have to assign damage ratings to each attack, which would be different for the AP balancing because it is based on the character's different supers.
I don't think the usual "no penalty" complaint applies because when you are getting beat and see an opponent get a super, that's still bad news. Difference is that you still have an opportunity to dodge.
Nevertheless, the gameplay system may have detered a few but the real problem was probably the marketing. I think they could still make something of it in an eventual rerelease or pack-in, perhaps. Hopefully they continue to tweak the online performance because some glitches tend to get in the way, it's my biggest problem with it currently.