Terry is definitely niche, and I see no way to justify him in any other way. He is an icon, absolutely. But in the grand scheme of things, he is pretty dang niche outside a certain crowd (FGC).
But the thing is; Sakurai has already stated he's fine with advertising "niche" JP IPs, multiple times through Smash. He doesn't really care if a series is SUPER POPULAR worldwide, and if he did we would have gotten something like Resident Evil as a Fighter rather than Fatal Fury, but again he doesn't really care.
Now if that's a problem with him is not really up to me to decide. That's just the way he rolls. BUT replacing Sakurai wouldn't really change anything. Nintendo is already a super conservative company in terms of risks, and the only way certain series/characters are even on the table is because they trust Sakurai a ton. I think it's pretty likely that if Sakurai wasn't the person in charge then we'd get far less 3rd party characters/fan picks in the long run. It'd probably all be characters/series that Nintendo is currently interested in.
TBF, I don't really think it's fair to take something like the Nintendo NY reaction super seriously because I'm willing to bet a lot of people already braced themselves for Terry via leaks. Like if Byleth was leaked a week or 2 before the presentation, the blow-back wouldn't nearly have been as bad (though it would definitely not be received well still).
But I do think the others are absolutely valid.
Which again goes to show the big difference between "popular" characters in Japan and in North America. Characters like Terry have a decent amount of visibility there (and in Latin America) partly due to their huge legacy. But around here they aren't seen as "big/iconic" characters as much. Something like Doom Guy/Master Chief/Crash would have a huge reaction in the West, but not so much in Japan (to varying degrees of course) because while they're still absolutely huge in the West, but in Japan they have dropped off in popularity (Crash is the most popular among those 3, but even then he's fell hard from his golden days over there). Likewise characters like Arle/Adol Christin/Yuri Lowell would have a huge reaction in Japan compared to the West because most of their legacy is in that region, but they aren't big out here (still, to varying degrees).
Combine this with characters that are popular within specific fanbases, outside of Smash; and you get even more "tougher" choices. Terry is big in the FGC but in the Smash Community he's not super big as a request. Geno is big in the Smash community, but, let's be honest he's nonexistent outside of here. In our heads, if people were given the choice between Geno and Terry, 90% of the people here would choose Geno. But in Sakurai/Nintendo's minds there's also other factors at play rather than just "fan-demand". Marketability, promotions, costs, company relations, future potential, legacy, popularity outside of Smash, all also play a an important role in terms of what they choose.
In the end, Nintendo's running a business (as godawful their marketing is currently), we aren't going to get a pass filled with 6 MEGA hitters (especially MEGA HITTERS that are only big in America). We're far more likely to get 1-2 "big" characters, 1-2 "niche" characters, and "1-2" promotional characters. These characters would also probably be split between Eastern/Western tastes (although I still expect most of the characters to originate from Japan still).
So again, just expect FP 1 2.0. Rather than HOLY COW we got Geno, Sora, Master Chief, Dante, Min Min, and Crash all in the same pass.
