That leaves you with emulation, which i doubt Intel could make faster than native...
If only you could go back in time and convince Intel of this! The first generation of Itaniums actually did x86 emulation in hardware. A brilliant idea: the only problem with it was that it was actually slower than software emulators (which themselves were pretty slow).
Anyway I don't think Itanium was every supposed to replace x86. This was before x86-64 existed and Intel thought it would be their only 64-bit chip.
Intel can't move to a new architecture because they are held back by all the millions of closed source applications out there.
Ahh but they did! It's called x86-64!
In the end it wasn't backwards compatibility that was the problem. x86-64 has the almost all the same backwards compatibility problems that Itanium has: software developers are forced to release two binaries for their code these days, an x86-32 binary and an x86-64 binary. Obviously x86-64 took off like gang-busters, though, even though it came out like 5 years after Itanium. The reason developers are happy to develop x86-64 binaries but not Itanium binaries is that there still doesn't exist a decent compiler for Itanium.
Okay, okay, I know x86-64 trivially does x86-32 "emulation" very efficiently, which helped it out, but I think the existence of extremely good compilers is what helped it more.