Rusty,
I could not disagree more. I have two boys. They both knew Thomas did not run on 3 rail and said so regarding Lionel's O set. I got them the Bachman HO Thomas and that was a tad too small. "S" was the sweet spot. Large enough so kids could put it on the track plus large enough for some fun accessories.
Also, following your logic 2 points:
1) If an engine is made in O, HO and N then the market must be saturated and it should not be made in S.
2) There are constantly new young children born each year who do not have a Thomas set and their new parents will go buy what is available then. If S is the best fit they will buy that.
--Rocco--