I'm going to try and do a semi-simple explanation with less hate and bias, but I can't help having a little, I'm not a journalist.
An Open Game
The original Dungeons and Dragons publishers finally floundered in the 1990's from bad decisions and low profitability. The grandfather of modern fantasy gaming was dying and the upstart company, Wizards of the Coast, took the money it made off of Magic the Gathering and rescued it. Vowing to treat it right, they put together a team of the most respected free lance content producers to create a new version of Dungeons and Dragons for the modern era. This group of free lancers created the most free lance friendly gaming system of all time. They pitched an "Open Gaming License", a sort of open source for the gaming world where anyone would be allowed to produce content for Dungeons and Dragons and SELL it along side official releases. This would ensure that there was lots of new stuff to buy without WOTC being burdened with doing it all themselves.
A Turn of Events
Wizards of the Coast was bought by multi-national conglomerate Hasbro. Hasbro has long been run by CEO's instead of gaming people for many years. They did not understand how a company could freely give away permission to make stuff for games, and they did not understand why a company would not cancel a line that did not make $50 million a year, especially when Magic the Gathering was making over $200 million a year. The caretakers of D&D from the 90's were bullied out or fired from the company, and Hasbro got a group of people they could work with. They wanted new editions. WOTC tried to tell them that new editions were not in their interest, and so they compromised and made a 1/2 edition, Dungeons and Dragons 3.5. A few years later Hasbro had enough of the stalling, and 4th Edition was to be created.
A Change of Audience
Wizards of the Coast needed a "Hail Mary" pass to appease their employers. Recently World of Warcraft came in and took an industry from 200,000 subscribers as the "top" tier, and turned that into 10 Million Subscribers. WOTC would now use this as the basis for their new 4th Edition. Unlike 1st to 2nd or 2nd to 3rd, 4th Edition would scrap much of the game and make its own. The current audience was gambled, put on the line, to try and get a new, larger, higher spending audience.
The Great Schism
Much like the often used "schism" plot line in Dungeons and Dragons stories, there was a great split among gamers. There have always been die hards of certain editions, but this schism was large enough to affect the sales. The internet created a huge underground movement to keep playing 3rd Edition, and allowed them all to gather. Hobby stores were split, and several could not even keep 3rd and 4th Edition materials in the same area for fear of arguments breaking out.
Enter Paizo
Wizards of the Coast needed to cut their waist line. The company never put much faith in modules or magazines, but kept them around for "tradition". They decided to sell contracts for companies to take over the duties of making these things. A group of fans in Redmond Washington decided to make a new company for the reason of buying the rights to do these things, they called themselves Paizo from the Greek word that means To Play. After a few years, WOTC decided to not offer the contracts out any longer, and so Paizo found itself with nothing to do, but a whole company ready to publish.
Finding the Path
Paizo looked around and saw the schism. It was already known that 4th Edition was floundering. Paizo got out the old book of Open Gaming License and researched it to see how far they could push this license. In 2009 they released Pathfinder, a game that is basically Dungeons and Dragons 3rd(3.75) reborn. Paizo put a new effort into constructing adventures and gaming aids for players. For the first time since the 1970's, Dungeons and Dragons(in the guise of Pathfinder) was being created by players that did not have CEO's from other industries looking over their shoulder. For the first time since it was created, Dungeons and Dragons was outsold by another RPG, Pathfinder was King.
A Turn Around
If there's one thing they can convince Hasbro to let them do, its create a new edition. WOTC by this time had given up on 4th Edition, cutting out all publishing of material a full 2 years ahead of the announced new edition. They went back to the drawing board, and vowed to go back to the older style of gaming. They would release alternate versions of the rules for whatever edition you loved to play the most. For two years they playtested and developed a new edition. We're about to see the clash of the Titans on a common battlefield. The new D&D was developed to compete with Pathfinder with a rejection of 4th Ed and a re-embracing of the old style game play. People are starting to ask if Pathfinder is going to evolve and change. Paizo made itself on the back of not changing, but will Pathfinder start showing its age? Many believe an RPG's life is about 10 years(WOTC is pushing out new D&D's much faster lately), and the back bone of Pathfinder is past that now. Online gaming is getting to be "normal" among many groups of players, and Pathfinder was developed without this in mind, while 5th Edition D&D does have that in mind. It will be an eventful year.