The "intentional limitations" are not unique to HDMI. It is a function of HDCP. DVI and DisplayPort also support HDCP and it's "limitations".
HDCP was implementated to reduce piracy by preventing people from "recording" content while it is being played, like you could do with a VCR and an analog recordings. Pretty much all digital video has some type of DRM, usually in the form of some type of encryption like CSS. Per the DMCA, it is illegal to circumvent copyright protection to copy a work.
To circumvent the DRM, another way of copying a work is to intercept the signal when it's being passed between two devices. A so-called "man in the middle" approach. HDCP seeks to prevent this by requiring a type of handshake between legitimate devices. Without the handshake, audio and video doesn't change hands. Things get messy when you start passing signals.
HDMI switching is easy. The source (a BRD player) and the receiver are both HDCP compliant devices. The receiver and the television are also both HDCP compliant devices. Everybody is happy. When you change formats, HDMI into television and toslink out, you lose your HDCP protection because toslink doesn't support HDCP. Instead of just eliminating the signal, the pass-thru is allowed, but at a reduced function. In this case, two channel stereo.
It all works fine when you're using devices that were designed to work together. If you're trying to intercept and steal the signal to circumvent copyright, it causes a problem. If you're trying to legally work outside the realm of HDCP, which is becoming less and less common since nearly everything recent is using HDMI, you have to accept some limitations.
Is HDMI better than component? Yes and no. Component video has the bandwidth to pass a 1080p signal. Unfortunately, many BRD players downconvert the signal to 720p/1080i when using component video. Component video is also an analog signal and is much more prone to interference. Obviously, component video is only a video signal, so audio requires a separate connector. None of the commercially available S/PDIF interconnects will handle the highest lossless audio from Dolby and DTS. So, yes, it can technically produce a comparable picture but it can't match HDMI in it's overall package.