It would've required boldness, and instead the downsides of what they were building and the too-small number of people on the C65 project just had it limping along until it had to be killed.
In theory, building a 3.5" disk drive into the C65 case, like the Amiga 500, was a great way to detract from the incompatibilities they were seeing with copy-protected game software on 5.25" disks. They knew they were designing something that wasn't 100% backwards compatible to C64, and then were surprised.