He does not see this as a failure, but as a nice result to an experiment. Nifflas likes puzzles but due to how KS took a few turns he went away from what he usually does, Knytt Stories is still a very good game, just different.
Nifflas of course likes it when he puts his ideas in games, but for him, the most important thing is that his audience likes the games. Knytt Stories is still one of those games that has a big fan base, so Nifflas is like: okay, this is different but still really good.
(correct me if I'm wrong Nifflas.
)