Kimo, you're right, but that does not mean there's not an oversupply, especially in these economic times.
Honestly, I don't know what the saturation point for MA schools is and if we are/are not at that point. That would require a market analysis. It's a complicated model though because there are different target markets, Kids, fitness/weight loss/MMA (modern)/traditional. Plenty of different factors.
But oversupply is not really the way to look at it because this is a disposable income item, meaning availability is far less important that marketing. I give you Starbucks as my example, did the world really need a 3 dollar cup of of coffee? Coffee was almost as easy to get as water, still is for that matter.
So are there too many Martial Arts schools? More variety is better for the consumer usually so in that sense no. Is there an oversupply for the available student base? Possibly, as everything has a saturation point (only so many mouths to drink the coffee), but in general I would say,if you can sell it, they will come.
On another note, the economy hurts, but usually by a percentage. Business may be off 20%, doesn't mean you close your doors, good business models weather the storm.
Unfortunately, (as CXT stated) good Martial Arts often is not enough.