Nice OP. The only thing I disagree with is your statement that Nintendo fundamentally cannot compete in the powerful hardware space.
Tathanen said:
If they had made a higher-spec machine, they would have had to sacrifice either on price or differentiation (the GamePad), which puts them squarely in direct-competition mode, which is a battle they simply cannot win.
I'm not so sure of that narrative of "poor Nintendo can't pony up the money to build a big box." Rather, what you said about their business model is the reason they don't compete like that.
Could they win it?
It couldn't get much worse than right now. They're obviously having development problems on the software side. But ignoring those, keep in mind that PS3 and 360 were both deemed successes and they were neck-and-neck. So could Nintendo make a box that sold 80 million with powerful hardware? Maybe. Especially, as you said, it's their software that differentiates them at the end of the day.
So the question then is:
Where do they go from here?
Everything you defined in your OP about differentiation seems to stem most from the DS/Wii/3DS/Wii U era.
That's the Iwata era. Sure, the Gamecube had some differentiation on the outside and with the Connectivity failure. But the Cube was a competing console, and it failed.
In comes Iwata, and everything's blue ocean. We'll be different here. We'll be different there. Swimming in money. But now, we have not one, but two, consoles that tried to differentiate and collapsed. 3D wasn't a hit, and Nintendo had to save the 3DS by sheer force of software.
Now we come to the Wii U. Again, very unique selling proposition. Again, a failure. And now, they're not even making money on the hardware.
So I go back to my question: If Nintendo tried direct competition, could it really be any worse than a console tracking in sub-GameCube numbers?
I don't know. And I don't think Nintendo will stop trying to differentiate itself, but
we may see something entirely different than the past. What just failed was "Here's a new handheld - with a unique feature!" and "Here's a new console - with a unique feature!"
Also, they have to keep in mind how fast their software teams can get up to speed. And with recent moves to consolidate their hardware teams under one roof, it only makes sense to me that the "new feature" phase of differentiation may be over. Just as Iwata learned from the GameCube, he'll learn from the 3DS and Wii U.
So what's next? What could consolidate both their hardware teams to create something that doesn't compete directly with the XBox Two and PS5? What could give them a boost in software production, while still maintaining full control over the hardware? It seems to me like
the hybrid handheld/console is the way to go.