Exactly the problem. They released too much junk, which is why their low end push failed. They don't need the junk Nokia was pushing out like the 635, 530, 430, 435 and all of those variations, they need their own 520, a low cost, high value phone for the masses.
The low end push failed because the product was weak. WP 8.1 is a horrible operating system and It doesn't have many apps. Even selling the phones under the cost and with a decent investment in marketing, people just didn't want them.
Variety increases sales. Just look at what happens with Android. There are thousands of OEMs, each offering many models. They cover any possible combination of specs and brand message. Android has 80% of market share.
Nobody buys high end Windows Phones. The Icon, 930, 1520 were all failures. Windows phone found a small niche in the low end segment, over 70% of the sales are low end devices. With a weak line-up of low end Lumias, reduced marketing spending and limited distribution, sales are going to fall of a cliff. With such a low market share, Developers won't even consider porting their Android apps to WP and the platform will be effectively dead.
Windows phone can survive without flagship devices, but It won't survive without a solid line up of low end phones.