It could go over Wi-Fi too. The problem isn't the network - the problem is that devices require a connection to things outside your LAN.

wifi gives the device a direct connection to/from the internet. Bluetooth stops that outright, and the application code decides which Bytes get sent to the device.

But i guess if there was a patch to WiFi which gave it a LAN connection only then that'd be cool.

You mean from POV of the smartphone? Fair enough. Though you can route Internet over Bluetooth too. So forcing devices to use BT is not a solution simply because it'll make the devices to ask for Internet connection over BT.

The devices themselves should not need Internet connection, period.

While that approach could technically work, in practise the support calls will be very lengthy and eat up all of your profit and then some.

That just shows how bluetooth is flawed and too complicated.

its easier on the customer and developer for there to be a passwordless local protocol.

I think how the wireless Apple headphones pair is how all these iot devices should be paring with your smartphone. Then its a if you are near it you interact with it.

Very, very, few applications really require remote access vs proximity based access.

I have a device that works exactly that way, and it's fine. I don't know what failure mode you have in mind.

I don't find bluetooth headphones, speakers and mice to always reliably and robustly connect. Several times a month the solution is to force a re-pairing. An informal poll amongst friends and colleagues shared the same experiences.

When bluetooth works, it works well. But the failures are very difficult to diagnose and address. Those are what the calls will be about and why they will be lengthy.