If true, I wonder how long Disney intends to keep the charade going. Scum that they are, they are probably well aware that this may cause some to cancel their visit, especially if Small World Holiday was a primary reason for coming to Disneyland. I realize it's not necessarily a large #, but it's also most definitely not Zero either. My guess is they will wait as long as possible before making the official announcement. And they'll claim they did everything they could to fix the problem, even though it sounds like they know the problem is unfixable in the short to medium term.
Ultimately, it will be the paying guest that suffers. Not only won't they get this ride that's insanely popular for a 2 month period, all of those people who ordinarily would wait in line or be on the ride, will now be spread throughout the rest of park. Creating the effect of more crowding overall. It would be no different than if HMH had to close for an 8 week period. Like HMH, Small World Holiday is a people eater.