Let's also not overlook the fact that they couldn't have done the demons Buffy did, or the ones Charmed did before their budget cuts (somewhere around the middle of the series, most of the demons stop looking weird and start looking like regular people) without them looking extremely cheesy. Dan Curtis may have gone a little crazy with the SFX sometimes, but when something simply couldn't be done, he probably knew it. And, as had been previously mentioned, DS was heavily under fire from many fundamentalist groups. Some churches even published anti-DS pamphlets, making it the first soap to receive those.
Vampires, witchcraft, and a brief descent into Hell pushed it enough; demons would have caused extreme public outcry. Plus, if it had been a male demon, they would have cast someone who would have turned into a real heartthrob and, in the next storyline, they would have drained him of a lot of his personality and made him one of the "good guys." The notion of a good demon is offensive or ridiculous to many people.