The concern is, like Greg said, that they'll muck up the talent balance on the teams. I'm a crappy player, so when I smurf in these games it doesn't have a big effect since I'm a lower pick anyway. What normally happens in the 4v4 and 5v5 games is that two players will become team captains and then draft-pick the other 8 players in a 1-2-2-1-1-2-2-1 order (for 5v5) or 1-2-2-1-2-1 order for (4v4) with the number being the number of the team that gets the pick so that the first captain has the first pick and the last pick and the second captain gets to pick two people immediately after the first pick. If someone is smurfing then they could get drafted lower than they should be. Normally captains will whisper to people they don't recognize and ask them who they are.
A few hosts don't like smurfs and will boot them out, especially if there is another player they are friends with or recognize wants to get in. Getting booted out is part of the price you pay for smurfing. (If you are really serious about playing, then you'll join with an established name.) Unfortunately, like you said, it can be hard on new players sometimes because hosts will suspect them of being smurfs. Some hosts also figure that if you don't have a player name somewhere with 30+ games that you are just too new to play in their pro game and will severely disadvantage your team.
The reason why this game has such low player counts has nothing to do with smurfing, however. There are a number of contributing factors. You have to go back to the game's release to understand it. First off, when the game was released it had low player counts to begin with. The most people I've ever seen online at once was about 280 people sometime in April or May 2008. If a game can only garner 280 people to play it online, then online multiplayer activity is just doomed from the start. One problem may have been the length of games and the slow pace of the early game before Quickstart was added in Entrenchment. The game also had problems with crashes (minidumps) and desyncs. Another huge problem was that only 15-20% of all players could host games! I had to flash my router's firmware and learn about port forwarding (with the very generous assistance of The Monk) in order to host. Also, if the game host quit the game or lost his connection for some reason, that would end the game 90% of the time since the game wouldn't "migrate" to a new host. These were bad problems back in the day. The end result is the low player counts you see today.
About 9 months after the game's release, all game updates were to be delivered over Impulse. This angered some people who didn't want to deal with it and who presumably never played Sins online again. It also increased the barrier for new people to come online. It isn't as simple as just clicking "Update Game" on a menu to patch the game. Presumably, tens of thousands of people play Sins in v1.00 or 1.05 (the last freely available patch) and have never heard of Impulse nor visited these discussion forums. They probably click the Ironclad Online button and figure that it's a feature that was never implemented. After all, to play Multiplayer you would click the "Multiplayer" button, right, which asks them to input an IP address. The release of Entrenchment split up the community but it proved to be a good addition to the online game, it introduced Quikstart, and probably didn't hurt player counts much. Diplomacy seems to have had a much more significant and noticeable effect. Dividing the community makes it harder for people to find games for the version they are on which causes a vicious circle where fewer and fewer people want to play online. (A whole lot more experienced players used to play it online prior to the release of Diplomacy.)
Another problem that may have plagued this game is the perception that it would take forever, say 4-5 hours or longer to play online and thus that trying to play it online would be ridiculous, so some people probably never thought to try it.
All of those reasons are why this game has low online player counts in spite of its being a great game. I agree that smurfing, and not really the smurfing, but mostly general incivility, rudeness, and lack of cordiality, is a problem. However, I don't think it was ever the driving force behind Sins's low online player counts. Sins had lots of other deleterious problems. If the player counts were as high as they should be (500-1000 people online at once) I don't think the smurfing problem would be as bad. The pros would probably just play in games restricted for pros and clan members, and hosts who don't like smurfs would simply require that your player name have 100+ games on its record to play or require having a minimum number of wins.
