I don't think it was by design - that assumes too much forethought in the development of HDMI as a standard, and if there's one thing that they can't be accused of with HDMI, it is forethought.

I think HDMI contributed to the problem, but I think there have been other factors that have made it hard for folks like Outlaw, Sherwood, Parasound, B&K, and similar smaller companies. HDMI is a tough nut to crack. Add room correction. Add a significant video processing solution (Reon, ABT, Marvell, etc.). That's two more components that, if done properly, are similarly challenging and fast-changing technologies to assess and implement. Then you have to decide what you're going to do about the other features that people are starting to expect now. New processing modes that expand beyond 7.1 will either require additional DAC channels or force you to select between back surround channels and front height/wide channels. Network capabilities like DLNA, Netflix, Pandora, and Amazon VOD are even harder to evaluate than video processing vendors, and costly in R&D efforts to develop. (Not to mention some leave you at the mercy of a third party, like Netflix, who may decide to push you down the list for certification so a new PS3 update or a new player from Panasonic or Sony can get certified because those clients have larger customer bases.)

I still think it can be done if you can hook up with the right partners for manufacturing and design. (Because smaller companies like Outlaw simply aren't going to have the in-house staff to write this sort of code, they will need consultants to assist with parts of it. There are presumably some companies out there that have had the opportunity to gain some useful experience in these matters over the last several years.) That being said, I don't envy them the task of actually doing it...