I see the applications for the low-end 8 bit controllers that Atmel makes and the ARM processors too, but I don't understand the niche for the ones in the middle like the 2560. It's fairly expensive and has a small number of pins and raw compute power and memory compared to ARM. What is it used for? It seems the only slam-dunk application would be legacy low volume apps where compatibility with existing code is paramount. What sort of products do we know the 2560 is in except for the Arduino Mega? And does the go for XMEGA and AVR32 as well which seem to fall in the same boat?
Its not as expensive as you think - commercial products will be buying multiples of 10,000 and the price breaks for high
volume are substantial - qtys of 500+ already about half unit price... Typically PCB board area (and associated manufacturing
costs and enclosure) is more expensive than the chips on it unless exotic devices are used.
Some of the market will be for gadgets developed on smaller AVR processors, but which have become more featureful in
successive versions and the developers move to a microcontroller that has more memory which is code-compatible with
previous versions. The cost of re-engineering the hardware and software to switch between vendors is not trivial and
carries plenty of risk compared with staying with tried/trusted tech - especially in a competitive market where keeping
up with market developments is a race with time.
Also when a range of similar products is developed it is desirable to base all of them on the same software base - so using a range
of uControllers from the same vendor pays off - the cheaper/less featureful units can shave cost by using cheaper versions. The more
advanced units in the product range will demand more memory, I/O, interfaces etc...
The uControllers vendor that can provide a wide range of software-compatible controllers will be favoured in the long run.