How does this explain their confidence in companies like Level 5 and Nihon Falcom? I understand Koei Tecmo but them? I'm almost certain fans would be more familiar with ASW games than theirs and I don't even mean just the license games. So the niche reason definitely can't be the reason why.
Legacy is a very important thing to take into account. Guilty Gear may not be a household name like Street Fighter but it is a big influence in its own way, being the primary example of an "anime fighter" and if people are not that confident in Mortal Kombat getting in, it does seems like the next best thing. But fighting games are pretty big thanks to series like Street Fighter, Mortal Kombat, and Tekken, so I'm certain some people know of Guilty Gear, even if they haven't played it.
As for the beat'em ups, they've made quite a resurgence in recent years, with River City being a noticeable part of that resurgence. Its recognitions has grown a lot over the years. And while it may not seem like it today, Double Dragon was almost as big as Mario and Street Fighter back in the day. It pretty much was a household name in the beat'em up genre. Heck, even today, I don't think a lot of people will be that clueless about what Double Dragon is.
But of course, if there's anything people do know about River City and Double Dragon, it's how they set the standards for the beat'em up genre itself. So if you put that together, along with everything else I just said, how can anybody lack so much confidence in their chances? Especially when there's ASW content in Smash with the River City spirits.
I don't have a problem with people being confident in companies like Level 5 and Nihon Falcom but Arc System Works has too many heavy hitters of their own to not be confident in them too.