What they are competing in (or would like to be competing in) is features, like video-acceleration, 2d and OGL3. Things that would actualy be easier to implement by integrating into the X Framework and opening up the driver (not to mention x86_64 and current Xorg and Kernel support).
Still there is the issue of DRM which seems to make it impossible to simply open up the closed-drivers (same for AMD/ATi).
Actually they do have allot to lose, they still have technologies that they are licensing to their competitors, as well as have several technologies that they are licensing themselves. It would cost them allot in legal-fu to do what AMD are doing to have devs and lawyers go over all of their driver code to release it. Not everyone does things with the intention of ever releasing the docs, let alone have most of their code easily readable by anyone other then the devs that wrote said code. Remember this is VIA/S3 they aren't very profitable as it is...
It'd be interesting to see if bridgeman could get us some number on how much it's actually cost AMD to release all of the docs they've done so far., including dev time and pay, and lawyer time and pay.
As for VIA's history of failing at technology, who says vIA stays the one in control? Nvidia already had the GPU and chipset down already, all they need VIA for is VIA's x86 license, call the new company nVIAdia if you like, they could easily then work on what they already do best while trying to hammer out a CPU to go with their chipset and GPU. You also forget that the massive amount of patents that nVidia and VIA have accumulated over the years, they could, possibly with a little help from AMD, start to lean on Intel till they can get their CPU tech on it's feet.
Remember, the only real competitions thats going to matter for all of them is Intel, they're the 800Lb gorilla in the room that is within a stones throw of being the only game in town. When your only choice for new hardware is one company you can bet that the prices are going to be far and away more for what you're getting then if there was some competition. Theres no way that the Chinese knockoff cpu would be allowed in the US or most EU nations, I forget the name of it, it was a few years ago, but I do remember that someone got one and benched it and it was slower then a P2 or something like that...
I'm not saying that S3 couldn't be doing an open source driver, or that they shouldn't, but the amount of work necessary for them to create a closed driver (and not have to remove all the proprietary/licensed IP) was probably much less than creating a new open source driver from scratch with no licensed/proprietary IP.
Of course if they're claiming that their driver is licensed under the GPL, I'd hope to see source code real soon now, or someone else will probably be filing suit against them.
I've just tested the driver with Chrome 430 GT: It's faster than Windows with Nexuiz 2.4.2!!