In practice, it's a "Mute- all sounds, but don't frustrait me when I try to watch a movie, or need to get to work on time -switch".This definition is fuzzy, and thus harder to understand, which was my second point.
Theaters, weddings, etc. are absolutely not the only time you want to mute things.
I didn't say these were the only times, I claimed this was the most common use case. Granted, I don't have data to back this up, so perhaps I'm wrong. I'm sure there are plenty of other reasons to mute, this just seems to be the classi case that I anecdotally see the most.
I for one really appreciate that I don't have to think about what state my mute switch is in when I get home hours later and try to watch a YouTube video.
This is hardly a big problem, though, certainly not worthy of confusing behaviour.
The common case is that your alarm is only ever set to wake you up in the morning and your timer is only ever set when you're sitting around, waiting for your dinner to be ready. It's very rare for you to set an alarm or a timer which will affect a quiet group environment.
I agree you wouldn't normally have an alarm/timer set for these times. It's probably a rare mistake, but an embarrassing and costly one! These aren't the only ways that an iPhone will ignore the mute setting, though. This "feature" gives you plenty of ways to shoot yourself in the foot.