I mean, the market did what the market does.

They released a device with the intent of being a tinker kit for programming and interacting with the physical world. The next technological jump for hobbyists from PIC to Arduino, became an ARM SBC.

Of course, they released a cheap ARM SBC, and industry quickly learned that these are great for rapid prototyping and any case that called for a small low-power Linux system.

I wouldn't say they lost their way. There's still a great hobbyists market around it, and tons of good competition. I'd say it's more like they are a victim of their own success.