The controller is not competing with a mouse! Valve is trying to replace the standard console controller and it looks like a large improvement over the thumbstick.

If by ratcheting you mean the repeated movements to look around, that is very similar to moving a mouse with a low sensitivity settings.

Of course this is meant to compete with a mouse. It's intended to let people play mice based games, such as FPS and RTS with a controller.

It's intended to take the gaming pc (and by, extension steam) out of the man-cave and into the living room to compete with consoles. This requires providing people with an ability for people to play FPS and RTS decently with a controller, rather than a mouse, or they are going to stick with their man caves and mice.

It's not competing with a mouse, it's competing with "a mouse and solitude in a man cave", since these are coupled together due to the fact a mouse can't be used in the living room practically. In other words, if this is close enough to the mousing experience to make the net experience of playing PC games in the living room better than the same experience with a mouse in solitude, it will be a hit.

The problem will be in multiplayer. Going online and being repeatedly destroyed by mouse players won't be much fun.

Also I guess difficulty in singleplayer games would have to take the control scheme into account.