The crowd out problem is like this
1) Nintendo needs to develop big, evergreen titles to sell a system
2) Third parties feel they can not compete on a Nintendo system, regardless of the install base, if Nintendo's titles sell millions of copies for years and years
3) If Nintendo does not make these games, the system does not sell and third parties point out the small install base as reasons not to develop.
For the Wii, they made a series of evergreen titles that basically blotted out the sun in the NPDs. Third parties felt they could not compete with this, so they went with low-budget, casual games that did not incur much risk.
For the 3DS, Nintendo took the opposite approach. Launch small, hype up the hardware, and let the third parties have the reins. This worked equally poorly, as no one wants to buy a system without those Nintendo titles to bolster it. So third party sales are still pretty bad because no one has the system yet and are waiting for Nintendo to release, say, Mario Kart. At which point Mario Kart becomes the big seller and blots out the sun.
Nintendo has to find a way to navigate this problem for the Wii U.