I think your main point is correct, that phototypesetting at the time was really bad and that's what drove Knuth to write the tools. (He had been happy to publish with Addison Wesley because of the quality of their typesetting, and now if they were going to move to such an inferior process, it was very upsetting.) The details are off though: phototypesetting is precisely not digital typesetting — in phototypesetting, the decision of where ink goes on the page is controlled via light and lenses and a fixed set of fonts that have been made (physically) for them; it is not controlled by arbitrary 0s and 1s, which was the appeal of digital typesetting. About troff, see my other comment in this thread.