I'm a little disturbed by this development.
Firstly, how can ROL expect to gauge the "real level of demand" for a product if they don't actually ask the relevant people?
Secondly, the impression I got from the SE Show was that the Merlin wishlist and relevant information was to be handed over to ROL. If ROL are now hoping that Castle will quietly drop Merlin and leave them to do desktop development, it suggests a lack of communication (which I find hard to believe as Paul M was in the room when Jack L stated that the details were to be handed over).
Thirdly, and to my mind, more importantly, if ROL turn round and decide there's insufficient demand for a 32bit Select (or whatever) it leaves the future of RISC OS on the desktop looking rather bleak (as the desktop OS developer would be showing a distinct lack of interest/resources in moving the platform forward).