The DS can do better too. It's not the hardware--it's Nintendo's strategy.
I don't really want to turn this into a competitive vs. casual thread, but you're greatly mistaken in saying1v1 no items is not fun--it is, and that includes the vast majority of casuals too. Competitive Smash was developed to make the game as fun as it can be, not to take the fun out. The goal of the standard tournament setup is to enrich the gameplay, thus making it more fun. When you see enthusiastic players in tournament videos, they're not excited for the money--they're having the time of their lives playing this great game.
But I digress...
On the casual side...
You mentioned balance. The truth is, there is no balance to the casual crowd because to them, this game is a button masher. It's a party game, and in such realms, balance doesn't exist.
One thing I want to stress: ultimately, casual players won't care what setup the game is in. To them, this is basically an orgy of all their favorite characters. The gameplay could be completely overhauled and it wouldn't matter too much.
And speaking of casual players and setups, I've seen the strangest setups amongst casual players. Some swear by slow-mo Melee. Others won't play anything but stamina mode. Still others have a ruleset that makes Smashwiki's Tournament Legal page look pale in comparison--I've see everything from the banning of Young Link to Hyrule or Corneria only to a rule against edgehogging. So to sum it all up, to casuals, setup isn't a big deal.
Actually, now that I think about it, I believe that Sakurai has no fanbase in mind at all--he just wants it to be an awesome game. He knows that it'll sell either way, and if it leads to relatively poorer sales of ssb4, it's not his problem.
And again, I think trying is better than doing nothing. It can't hurt, right?