I agree with 100% of what you said, which makes me think I phrased my point poorly haha.
Arle's legacy and Puyo's legacy are, of course, intertwined. If we're building a literal Museum of Gaming History, then of course Arle gets in as the queen of puzzle games. Madou is part of that as well - frankly, it's a fairly aspirational story about creativity, as a dungeon-crawler's spin-off game managed to become one of the most famous puzzle games worldwide. Her being a character famous for being from a video game is very normal for a video game character, as you said haha. So, yeah, Arle is iconic and I do think she totally could kick ass in Smash.
My point was one of marketability. Arle is famous due to people knowing her as the Puyo protagonist. Moreover, even if some western fans haven't heard of Arle herself, the pass can still be sold on the Puyo aspect - saying "Hey, here's a character from the falling block series you knew and loved as Kirby's Avalanche/Mean Bean Machine as a kid! Look at the falling blocks on her stage! You recognize those.". Selling Arle as being primarily from Madou loses this wider marketability and, moreover, kind of misses the point of how many people fell in love with her character? It feels to me about as logical as if they had sold Banjo as part of a Diddy Kong Racing pack, featuring a Diddy Kong Racing stage and a moveset where Banjo is in a kart for the whole time. Yeah, that would honour his origin, but it would ignore why he became famous and why people wanted him in Smash in the first place.
I was also contrasting her fame with Mario, as that was the example Geno used of a character who is represented by his mainline games instead of his spin-offs. Mario is the arguably most famous gaming character, so even when his spin-offs outsell his original games, it doesn't matter. He's still Mario Jumpman Mario and so he has a Jumpman platformer moveset in Smash. I don't think Arle's fame transcends Puyo in the same way Mario's fame transcends any of his spin-off games. I don't mean that as an insult to Arle - 99.9% of video game characters are not remotely as famous as Mario - but I think acting like the relationship between Mario and Mario Kart is comparable to Madou and Puyo is a bit disingenuous. Puyo is what made Arle famous, while it's not like Mario's mainline games ever stopped or that Mario Kart has fully overshadowed their existence.
I do think that Arle could (and probably would) come with Compile-related content - possibly having her original design as one of her skins, maybe coming with a couple key Madou music tracks or spirits, and possibly having her older magic abilities used to fill out her moveset. I just don't think she'd be a Madou-primary character as Puyo Puyo is what gave her her fame...
Though, frankly, all this said, I probably would like Arle just as much if she did use her Madou skills, as I do want more sorcerer characters in Smash in general...