They never saw the market. They didn't even know it existed.
Woodman is a surfer—the market was right in front of him. He saw a need, and he solved it with a very simple, high quality device tailored to that specific need.
A better argument there has never been for solving real problems with real solutions, rather than trying to essentially trick people into believing they both have a problem and need a solution. The latter is possible, but the former is a far better path to success.
The funny thing is that Canon, in particular, pretty much stumbled into pro/prosumer video and has done very well with it. Whether it causes itself harm by starting to try to deliberately segment its video and stills/prosumer video market remains to be seen.
But, yeah, they weren't aiming for the sports video market and they don't especially have a brand there. Actually, neither Nikon nor Canon have an especial brand in even waterproof cameras. (Canon does have one--only recently updated--Nikon AFAIK does not.) The point about getting out of bed in the morning is probably relevant. You get to a certain size of company and even large niches aren't especially interesting.
There are competitors, but none of them are a threat. The Contour has some traction, and the Sony ActionCam is pretty decent spec-wise, but nothing compares to the GoPro HD3 Black edition: 120FPS @ 720p, 240FPS @ WVGA, and even 30FPS @ 2.7k. They are still a generation or two ahead of their competitors.
The only thing I wish the HD3 Black had was GPS so that you could geotag your videos. That's about the biggest missing piece to that camera, otherwise it would be perfect.
Apart from the 2.7K mode (where would that be useful) the Sony matches the specs you mention. Specs aren't everything and I haven't tried either product. Go Pro has the better accessory ecosystem at the moment and may still be the better product in many ways.
I really like the look and design of contour's latest model (Contour +2), but having seen the user reviews on Amazon.com and amazon.co.uk, I feel that for me the software quality and functionality issues mean that I just won't buy it, unless this is greatly improved.
Specs aren't everything, you can compete on price. Lots of these alternatives are MUCH cheaper than GoPros. 99% of people don't even know of resolutions higher than HD, and 99.9% wouldn't know what to do with them - there are no affordable 4K TVs yet, it will take a few years.
It would require a serious investment to make a camera that would exceed GoPro in terms of quality and reliability, and then even more investment in marketing to get some sort of consumer mindshare. All of this for a market that is something like 5-10% of their point and shoot market. It's the type of gamble most companies aren't willing to make.