I don't think that the two things have to be mutually exclusive.
I don't know that you have to really cut back on DM factions a lot to allow for easier player factions unless it is a matter of actual server numbers, i.e. bodies to fill factions of either type.
DM Factions:
LEADERSHIP: I do think that you can reduce the number of DM factions with some consolidation and that would probably be good. A city should really have a central leader body of some sort, even if it is a bickering council. Whether a group, an individual, or some combination, somebody really needs to be in charge at least in theory or on paper. (this helps shape the overall open structure of the world)
LAW ENFORCEMENT: Whatever this ruling body is, it should have an enforcement arm (read: Militia type institution) and it should have some way of protecting its borders (read: Army type institution). To simplify and downsize, they could be the same with their own wizards/clerics/scouts/spies/whatever. One big guard faction to rule them all. (this helps maintain the overall structure of the world)
JUDICIARY: If you have crime and law enforcement and a government, you should have someone that does the Judge thing. It could be Knights, Judges, Magistrates, or just handled by the Law Enforcement of the Government leadership, but you'll probably need this sort of thing (this helps balance all sorts of things)
RELIGION: Churches should be at least DM influenced with a head priest and some other minor NPCs as structure, but it should be far easier for players to join and not necessarily exclusively. For those DM factions like churches that had active and well-played characters in it, the DMs could severely back off on the guidance without much concern and let the players shape things. For those churches with sketchy support/interest/characters, they might need more guidance and supervision. (this helps maintain the morality of the world and its balance)
UNDERWORLD: There should be some sort of organized crime run by DMs. Thieve's Guild, some sort of syndicate, pirates, bandits, whatever. (this helps balance the guard faction and thus the balance of the world)
MERCANTILE: Optionally, you would have some sort of organizations that were DM managed at some level that dealt with the economy. (this helps balance the value of money in the world) (this is arguably the least important to have actually represented as money can be modified without having a physical manifestation of a group)
DM-Lite Factions:
These factions could have DM support but are tied in some way to DM factions. They are related to DM factions and answer to them in some way for their perks, but they are mostly run by players. The more they contribute to the DM faction that sponsors them, the more they are active, the more rewards/benefits they could receive. This could be a graduated scale from starting with a small building with no keys, to adding keys, adding storage, larger headquarters, NPC guards in HQs, to perhaps one day becoming a DM faction mostly controlled by players. They could be things like:
Smaller guilds gangs of criminals that pay dues or work for the main crime boss in exchange for jobs, money, gifts, influence, bribes, whatever.
Smaller shrines or churches to lesser deities. They could answer to a NPC in another unrepresented city who could provide some influence and oversight with players doing most of the work.
Mercenary groups. They could be hired on temporary basis to accomplish tasks for City Leadership, Larger Churches, Law Enforcement, mercantilism, or even the Underworld. The sponsoring group could provide resources in exchange for services.
Knightly Orders. They could act similarly to mercenary groups in that they could be used by good DM organizations to conduct certain tasks in exchange for sponsorship.
DM-really-lite Factions:
These factions don't necessarily contribute anything to the server at large, but have common interests and have fun doing them. They don't get many perks because they don't do much to "earn" them.
Small cults that don't really have a supporting clergy elsewhere. They could secure their own areas and do their own thing without any real DM attention unless they were doing something interesting.
People that have shared interests and just want a place to hang out and have poetry reading parties, or roleplay basket weaving, or don't like sitting in the market because they get wet. They can use their resources to get a place to hang out and they can do whatever it is without any real need for DM attention unless they do something interesting.
I think with this graduated approach you could provide established DM factions overall in charge of shaping and balancing the world to prevent things from swinging too far any direction. If Law, Crime, Good, or Evil got too powerful, the DM NPCs could make maneuvers to alter the balance. They could use their DM-Lite associated factions to help this and players could see how their actions shaped the world, even if it was just shifting back to "normal" Sometimes, the DMs could intentionally allow one side to get too far to create impetus for a larger swing back and after a few slightly smaller swings you reach equilibrium for awhile. This allows the DMs to give each of the ends (law, crime, good, evil) some "on top" time without breaking the entire world.
In all of it the DM Really Lite folks could just continue to do whatever they like to do without feeling left out or unappreciated. If they ever got to the point where they were contributing to the overall server's balance, they could potentially become DM-lite factions or even DM factions.
Another nice thing with the graduated approach is that sometimes a faction hits a run of bad IC or OOC bad luck where you lose key characters and they dissolve temporarily. Without some sort of NPC continuity, they may never overcome the inertia to get back going. If that small church with a few key players had that run of bad luck, but the church stayed with a NPC, it might make it much easier for a new group to jump in and pick back up where the previous group had taken it.
This also allows for players to find a group they fit into best for their time investment and play style. Some do well with more structure, others with less, but they can all be part of the "economy" of the world.