Actually, I think that a modular castle could be a great sell, as long as TLG markets it right. They need to make sure that where ever the set is, it is with other modular castle sets under the lable BUILD YOUR OWN CASTLE! Specifically, they should probably have sets like (and this is just me):
-$15: A 10-brick high wall section, with 2 minifigs (a guard from each faction), and interchangable decorations (dark green and red).
-$25: A 15-brick high tower which can stand independently or with the wall, with 2 minifigs (an archer from each faction) and Interchangable decorations.
-$50-$60: A gatehouse under siege- a REAL Gatehouse, about 18 bricks high, a really well defended one with real towers. With 4 minifigs (one archer and one knight per faction) and a battering ram with interchangable decorations.
-$120:A keep, built modularly, could be a set on it's own. It would be 2 stories tall, with removable floors that give you access to a basement with dungeons and an armory, a second floor with a throne room/dining hall, and a staircase leading up to the roof. It could have a drawbridge leading up to the entrance on the second floor. It would include 10 minifigures, (Kings, a knight, a 2 guards, in their faction colors, and 2 servants) and shields, banners, tapestries, and flags that could be changed to make the castle faction- specific.
Those are just my ideas. Other buildings which could be added are:
A Windmill
A farm
A bakery
A stable
A marketplace
I'm sure there are more ideas out there, this is just what I personally would liike to see.