I'm not a big fan of Colt, despite the historical significance of their name, it seems that they have allowed the quality of their product line to deteriorate over the years. This has put them in a weakened position to compete with other manufacturers.
I can remember when the firearm that is routinely referred to as a "1911" today was simply called a Colt .45 Automatic.
Their dominance in this and other areas has withered. So it's not surprising that their market share has also dried up. If the private sector is rejecting their products in favor of their competitors, who else can they turn to but the government? If they want a contract, they're going to have to jump through some hoops, even if they alienate the private gun owner that has supported them in the past. It's a matter of financial survival for them.
In addition, there are studies that show that if this "smart gun" technology they are working on is successful, it will open up a significantly new and sizable market of people who are NOT presently gun owners.
Rather than try to win back us old timers who may harbor some disdain of their tarnished reputation, they will aim their efforts at the fresh meat they see just over the horizon.