To be fair, with all due respect to Hyle Russell, I don't see any real reason to believe his "Dave Throat" source, it always just sounded like fanfiction to me.
Yes, that is assuming that source was correct.
But even if not, Retro did want to use K. Rool at some point, and two games and a port later, after an increasing amount of Rare content finds its way in, he's still absent. Meanwhile Smash gets him after one ballot.
And I get Smash is Smash, but Retro makes
the actual DKC games.
I think they do it on purpose, because Mario has to be casual, and fanservice has to stay at a minimum.
Think of a kid who has never played a Mario game: that kid must be able to understand all the content of any Mario game even with 0 experience with the series.
This is why when an old character is reintroduced, it's treated as if it was a new character, with little focus on their past roles (think of Pauline, or even Daisy at the time when she came back from Marioland), and when there's an actual reference to an older more obscure game element, it's extremely minor or left ambiguous (Sherbet Land in Mario Kart is probably a reference to the same location from Warioland, but it's still not clear if it's intentional or just a coincidence, because there is no Warioland element in the tracks with that name).
Baby characters are cute, who cares if they aren't canon? Baby DK is canon? That character from Yoshi's Island DS? You have to ask many questions and do research in order to fully understand it, so it's not worth, because you know, Baby Rosalina is cuter than Baby DK, so why spend effort in making a baby monkey? Not to mention Baby Wario. (I'm sarcastic obviously).
Mario must not have a real continuity, it must not have an hardcore community that can potentially create discrimination among fans; new game, new world... everything back from start, every player comes back to being a casual because their prior knownledge becomes useless, events from previous games won't be referenced aside of some very minor easter eggs.
When a character is excluded (such as Waluigi in MK7) it's probably because it doesn't fit the specific mood of that particular version of the game, or because they already have another character who appeals to the same type of players the removed character was appealing to, and its presence would be unnecessary; or even worse, maybe so in the future they can release another similar game with the missing character included, so that the new game feels different. they do this type of character rotation in some games, especially in Mario Party.
I literally stopped being a Mario fanboy when I realized they were treating the franchise this way, and it happend around Mario Galaxy/Mario Kart Wii.
I'm honestly surprised that Funky Kong in MKWii was a thing actually, because it's the only character who don't fit the logic; it must have been a favorite of the developers or something. Oh, and ROB... WTF they were thinking/planning when they put ROB in MKDS?
I think you're over-thinking it. The target is obviously largely kids, but appealing to the people who do know the characters won't hinder the enjoyment of children, because all Mario characters are made to be kid-friendly. Kids and casuals don't really care about which title spawned which character.
Meanwhile, instead of including the third baby princess, you could include one baby princess, one baby monkey (ape, whatever, shaddup), and, idk, a completely different kind of character, and in effect cast your net much wider. I agree kids won't care that they come from Yoshi's Island DS, but it's a baby DK. That's going to be cute regardless of where it comes from, kids like animals. And you still have, like, Baby Peach. Who also comes from Yoshi's Island DS, btw. But some people will care about the character past being cute, and those people will also be catered towards without really losing much from the casuals.
Casuals and kids really aren't that picky. You think they're going to be turned off because instead of a third Mario, there's a pink dinosaur creature with a bow? Instead of seven Koopalings, there's a second or third Kong? Instead of generic baddy, there's Petey Piranha? As long as like, the core eight are there, casuals and kids are pretty contented.
You act like people can only enjoy these characters if they know from where they originate. Which, by that logic, would confuse casuals when they try to remember which games Toadette or Baby Daisy or Pink-Gold Peach came from to land themselves in Mario Kart. If original characters can curry favour, existing ones definitely can too. It's not like appealing, kid-friendly designs only stem from the Mario Kart team themselves.
And I mean, canon is completely a moot point for the games I'm talking about. There's no canon in Mario Kart, or Mario Party... it barely exists in the mainline games.