For the mass audience, I think marketing was definitely the biggest problem. Whatever word of mouth got the Wii out there just didn't show up for the Wii U, and the OP is right about the hype machine not building. Nintendo needs to do something about this, and they need to do it this spring, preferably around the time
Wii Fit U comes out. I think it'll be a real bad omen if that game fails.
With core gamers I never thought the Wii U was going to be a massive hit. Something as new as the GamePad doesn't show its appeal to core gamers immediately. The DS didn't until its second year when excellent games actually started coming out using the touch screen. That alone was never going to have the immediate appeal of shiny new graphics. I was hoping that maybe the 3rd party games on Wii U would look slightly better (like what console ports look like on PC), but even then Nintendo probably wouldn't have one of their core franchise games out to pull in the core gamer. They're probably still working on ways for that to happen.
On the whole insular development thing, I definitely also believe that there exists some kind of philosophical divide between Nintendo and western game developers. For starters it seems like no Japanese publisher or developer at all really understands western game development, possibly because they don't understand where it came from -- PC development. Even if they did or do understand though (the publishers making engines like Capcom, Square Enix, and Konami might), I still think it's also a matter of a deliberate choice not to always make games in that direction. Japanese developers aren't as obsessed on the ceaseless march forward of graphics technology.
I doubt Nintendo is ignorant of where top of the line gaming specs are going to be in 2013 or 2014, they just chose not to invest in that direction. It's not even like they packed the Wii U with 2005 hardware -- at the very least its graphics processing is quite recent, Nintendo just made a different decision compared to everybody else as to where they wanted to put their money.
I think Gunpei Yokoi pretty much perfectly laid out Nintendo's whole philosophy -- taking mature technology and applying it in new ways. More specifically, Nintendo is a company that likes to make fun physical interfaces. The device that got Yokoi into major development at Nintendo was the
Ultra Hand. That's the kind of development they think makes games more fun -- to them, prettier graphics only come into play when absolutely necessary.