There has been some debate and a little confusion (and some misinformation) about whether or not extension developers should upgrade their extensions to Joomla 1.6. The short answer is "yes, except if you have an extension that is now ruled obsolete by the new functionality."
With the release of Joomla 1.6, the Production Leadership Team embarks on time-based release cycles. In the past, features would be worked on in the development trunk and when complete, the release was declared "ready." So a new version of Joomla is never released until all the planned features are set and stable. This is the reason why both Joomla 1.5 and Joomla 1.6 each took three years to complete. This results in a long lag time for third-party developers to update their extensions to work with three years worth of core changes. That can be a daunting task for even the smallest of extensions.
Time-based release cycles are a totally new approach for Joomla. The way it works is there's a vision/theme set for the next release around six months in advance. For the July 2011 release, the theme is "Rediscover Content."
This vision is what the Production Leadership Team has outlined as top priorities for the release and comes from community ideas in the Joomla Idea Pool (or the Joomla Feature Tracker) in accordance with what the development team determines as in line with the vision. That doesn't mean that all the goals listed will make it into the next release or that nothing except those goals will be included, but it provides a focused path for the team and those in the community who want to help contribute.
Once a new version is released, there's a period of maintenance and bug fixes. Then the teams go into the next development phase of working on the next version. During this phase, features are worked on and stable branches are merged into the code trunk. Anyone who wants a code branch to work in can request one and it's their responsibility to ensure what they're working on works with the latest stable code trunk. This improves the likelihood it will get merged into the core and means that developers can work on anything they want all year round, regardless of release timing. Once it's ready, it can go into the trunk which prevents the "coding frenzy" that happens in the period leading up to a release (instead of a "stabilization frenzy"). Then there's a merging phase around 6 weeks before the release date where the code is stabilized up until the final date.
All this ensures the trunk is constantly stable and a release theoretically can happen on any given day. So every six months to the day, there will be a Joomla release. The contents of that release (which will obviously vary from release to release) will determine the numbering structure. So we have to refer to future releases by their dates, not numbers (therefore, that doesn't mean Joomla 1.7 will be coming out in July 2011, or ever).
The changes from Joomla 1.5 to 1.6 are huge (in my humble opinion it should really be called Joomla 2.0) mainly because of the change in ACL and the new content structure—it's been three years in the making. But going forward, the changes needed in extensions to make them compatible with upcoming releases should be much smaller due to the shorter release cycle. This means this is the last time extension developers should have to "bite the bullet" in the time needed to update their extensions.
That also means extension developers will need to switch to a more progressive development process—doing smaller updates and incremental development work instead of a huge chunk of time every few years when a new version is released. In the past, it was a stretch to have an extension compatible with two different versions of Joomla. With this new model, an extension may be compatible with five or six versions due to the shorter cycle. Extension developers will be able to better plan their own development effort and costs (subscription-based sales will likely increase under this model since users won't take the tact that they'll only buy when there's a new version, but instead will keep a continuous subscription). Some of this also applies to site builders and administrators. The incremental changes from version to version will make life much easier for those folks upgrading from release to release (whether a long-term release or not).
So if you're a Joomla extension developer, it actually does make practical and business sense to upgrade to Joomla 1.6 since roughly the same amount of work will be needed to upgrade to the July 2011 version of Joomla. The work to upgrade to the July release will likely be trivial, you'll be one of the first group of extensions on the cutting edge, and your customers will certainly be happier.