Existing methods suffice

No warranty on broken design So one stricture on external entities (no DOCTYPE) precludes useful processing of entities (for characters, etc.) in those files, but the W3C sees no problem.
Entities as a last use for DTDs Perhaps wisely, most of the schema languages that have attempted to succeed DTDs have left the issue of entities entirely alone. As XML Schema and RELAX NG have made inroads on XML processing, entities, and all the issues involved in entity processing, remained.
Priorities No one seems tempted to open XML 1.0 processing in any substantial way, as that would add fragmentation to the world. Or perhaps they're just seduced by the Infoset-Schema universe and want to keep piling layers on top. Or perhaps they don't actually use entities.