Good topic, and obviously one that is of interest to you (and I).
Oversimplified, the answer is yes. This is a trend that stretches back to the first update (the E36 M3) that will continue with the new one, as well. Each generational update made for a demonstrably better car, with the only downside being that the new car was less fun to drive than the car it replaced. This is mostly due to size and weight gains, but can secondarily be traced to advances in suspension dynamics which tend to "tame" the car somewhat compared to its forebear.
Some of us tend to decry this tendency toward a more civilized experience, car-wise, but it's very hard to argue against a vehicle that is definitely better than the car it replaces in all of the usual ways one measures.
This tendency is also true of all the other cars on the planet. Witness the fairly recent U.S. introduction of the Fit, Yaris, etc., made possible because the Civic, Corolla, et al have grown up and gotten more features with each new iteration, so now there's a viable market underneath them.
All that said, I believe that manufacturers work very hard to preserve those qualities they feel are important to their product. Much of this is cultural (i.e. - "That's the way we do it at BMW."), and culture is a very hard thing to change, whether it's a company or a country.
I'll use Porsche as an example. They're very little different from any other maker in regards to the tendency mentioned, but have clearly worked *very* hard to preserve "porscheness" in their vehicles,
As an example, a couple of weeks ago I drove a 997S that one of our sons recently purchased, so got to compare it to a 996 Cabrio that our other son has had for several years. The 997 has more of everything compared to the 996 (more power, more stick, more equipment, it's a bit bigger, etc.), but it retains the same basic handling characteristics, in that it gets that Porsche rear-end wiggle when you get up past eight tenths or so, so you need to know what you're doing when and if you drive past that point. The 996 has the same tendency, but more so, and more suddenly. The 993 I drove way back when had that same tendency, although much more extreme; enough so that I stopped the car after negotiating a splendid winding road, got out, and checked the tires looking for a possible flat.
Porsche could engineer those traits out of the 911, but they'd be crazy to do so. Half the guys who buy them do so partially because the car makes you feel like a hero once you learn to tame the beast, and my guess is that if Porsche tames the car, then some of that marvelous steering feel will be lost, amongst other things. It would likely be even faster around the 'Ring than is currently so, but with less enjoyment.
Our 997S guy is a fighter pilot, and he has said in regard to those tools in general, "You can have stability or maneuverability. Pick one."
Seems as if that's true for hot cars, as well.
A final Porsche example of how important it is for manufacturers to preserve the qualities they feel are important: Our daughter in law's dad used to head up the ceramics division of Corning Glass before his recent retirement, and he talks about not being able to corral Porsche as a customer. That division of Corning's bread and butter product is the ceramic core for catalytic converters, and they have more or less dominated the worldwide market.
Couldn't get Porsche, though, and when he went to a full-court press to nail the account, Porsche showed him why he could *never* get their business.
At the plant in Germany, they fired up a new 911 with his cats installed. Nasty, snarly, edgy, etc. - all the things you expect in a Porsche sound. Then they fired up another 911 with their standard metal-core cats.
Nastier, more snarly, more edgy. NOT louder.
Turns out that the ceramic cores were absorbing some of the harmonics that the metal cores were either letting through or were actually generating. This was something only apparent in a side by side comparison, but it was clear to the Porsche engineering types that he was never going to get the business.
Trust me that BMW will be the same way about protecting what's important to them in the new M3. It will be a better car in nearly every way. Faster, better handling (in the sense that it will negotiate a twisty road more quickly than the E46 model), and more civilized in the process. Some of us (me included) will lament the loss of edginess, but most of us will revel in the improvements the new car will bring.
Bruce