Lots of people seem to think that the ending needed to have been happier.  This isn't true as the whole story is about how Dr. Horrible became a Super Villian.  If he and Penny would have ended up together, of course she would have softened him and the film would have been badly named.

Rather, I think that it should have in some way been shown that Captain Hammer was the cause of Penny's death in Dr. Horrible's mind.  This would have proved to him that he was in the right.  It's possible this was the intention in the script anyway, but if so it got lost.  Dr. Horrible's song should have been more explicit about it.  “Captain Hammer and the world will rue the day they killed my Penny.”  Also, it might have made him more demented if Penny really did love Hammer as opposed to slinking away from him, which I would have prefered to the more tragic ending of her and Dr. Horrible almost getting together had not fate intervened.

Secondly, there's the problem of Penny.  You can't kill the most loveable character in a cast without a good reason.  And in this case, that reason didn't exist.  It was just sort of confusing rather than pathetic.  I would have had Dr. Horrible quickly fix his freeze ray and freeze Penny to keep her alive almost at the brink of death.  Then, he could continue having her as his motivation for gaining fame and money through his dastardly deeds as he search for a way to save her.  This would have brought things together better too.  For one thing, the freeze ray which was assembled throughout the picture would have meant more.  Furthermore, if Penny still loved Captian Hammer, while Dr. Horrible believed she loved him, or at least would love him, the whole situation would have been delightfully ironic.  Not to mention enigmatic, afterall, what will happen if she does wake up?

As it is with Dr. Horrible believing Penny loved Captain Hammer as she died, when really she didn't, everything is just sort of blah, not to mention unbelievable.  After all, would this situation lead truely lead to greatness in their line of work, even if it's villany?  The energy required for that has to be rewarded or fueled in some way.  In real life this would just lead to a murky depression, both for the characters and the viewers.

I have to say I wasn't fond of the ending at first, and after watching it several times I think it really fits. I have to disagree with Penny being the loveable character who's death was confusing. I think Penny had to die and it really worked. It wasn't important whether Horrible thought it was Hammer's fault or not. Hammer fired the gun, but it was the doc's raygun in the first place and whether he thought ahead or not, he came to a place where Penny would likely to be, to kill her boyfriend. The doc must have expected Penny to get hurt by his actions, just not in the physical way it happened. Which is where the consequences play such a crucial role. The status isn't quo and when power was finally in his hands, look what happened. He killed the girl he loved (intentionally or not, he is partly to blame). So shifting power did nothing to change the state of the world. In that last song, Horrible sings:

So your (Penny's) world's benign

So you think justice has a voice

And we all have a choice

Well now your world is mine, and I am fine….

This is the crux of the story, I think anyway. He got what he wanted, power shifting and all that, but where did it really get him? He made his choice, several of them, and where it left him was “fine”. Besides, Horrible and Penny never would have worked anyway. He fell in love with her before he knew what she belived in which was vastly different than what he did. I think if Penny hadn't died, everything would be much cheaper about the story. Fixing the freeze ray or something like that, would have been too easy (and Joss never goes the easy route). It wouldn't have forced Horrible to make a choice. That's what I think anyway. And on a further note, I don't think Penny ever loved Captain Hammer. She believed in hope and in a world that could be made better and truth or not, Hammer was the “Hero” fighting against all those evil forces. She cared about him for that reason, but if you look at her songs and responses to Hammer, you can tell that love really isn't there.

Not to mention that it happened like that in every episode:

1. His heist ended up with Penny in CH's arms.
2. His desire to spend more time with Penny ends up with him pushed too far.
3. His desire to put an end to CH ends with Penny dead.

Whatever he ends up doing in 4, can you imagine how Horrible it must be to top the loss of Penny? The only way 4 could end would be Billy dying, betrayed in the most petty sense by what he loved most.

Do you really want to see that? (I wouldn't mind because we'd likey see Felicia again, but what about you?)