I guess the thing is that Paizo represents a huge chunk of what had been WoTC talent;
WotC did that to itself.
Pathfinder is a huge chunk of almost entirely WotC-created intellectual creation.
It can be argued that the majority of talent that created 3.x is gone from WotC now. WotC also pretty much did that to itself, as well.
Pathfinder's mechanics are founded on Open Gaming Content material which is covered by the Open Gaming License. The OGC and OGL in the first place were immense boosts for all of gaming when they appeared. If they had not appeared, the industry would be quite a different place today.
WotC decided to move to 4.x and make access to that material more restrictive for other publishers, ending the spirit of the OGL era for them. They made their bed with these decisions.
Paizo, with more than perfect legitimacy, decided to take the OGL 3.5 material and forge its own improved version that was still compatible with 3.5.
There is nothing questionable, at least for Paizo, about what occurred.
It's not like a third party game & publisher came out of nowhere to challenge D&D [...]
It's like a publisher used public information, which anyone else could have used, to base a game upon and sell it, with total legality.
I suppose some might argue that Paizo's and PF's existence drains some of the market from WotC and 4.0. I couldn't disagree more. If PF didn't exist, I would still be stuck with 3.5, unwilling to so much as touch 4.0.