I don't think they will all flame out. We don't seem to be. The model is different this time. The old model was practically an adverse selection filter. That's why we've always resisted being called an "incubator." Though frankly we may as well give in to that, because few people now remember the previous generation of them.
and i think the conditions / methods have improved substantially since 10 years ago. there may be a lot of folks who fail, but there will be successes (already have been with YC, a few others). kudos to PG :)
If all you did in 2000 was internet startups and the bubble burst, of course incubators for internet startups would be wiped out along with the companies. If there was a "housing" centered incubator in the early twenty first century, it would have done well until the bubble burst as well.
It has nothing to do with early stage startup support services (since YC isn't really an incubator), but with everyone in the space putting all their eggs in one basket with internet technologies.